How Much Term Life Insurance Should I Get?
Figuring out how much life insurance you need to properly provide for your family should you die, while not paying too much in premiums while you're alive, can be tricky. You can choose a simple formula that requires only a single calculation or one that is much more complicated. However, in general, the simpler the formula is, the more likely it is to overestimate how much insurance you need.
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Do You Need Any?
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Before determining how much life insurance you need, first determine if the answer is zero. If you have no dependents, life insurance is something you can do without since it is meant to help your dependents recover from the financial blow of your death. Only if you have someone else depending on your income to survive do you need to provide for them in the event of your death.
The Simple Way
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The simplest way to figure out how much insurance you need is to simply base it on your income, since that is where the financial impact of your death will be felt by your family. The common rule of thumb is that you need up to 17 times your annual salary in life insurance coverage. The idea behind this is that this amount of money can be invested and will generate a large enough annual return to replace your annual income. As your income grows, it is quite simple to know how much to adjust your insurance coverage.
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The Complex Way
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By comparison, a needs-based method of calculating coverage is more complex. This involves calculating what your dependents' annual living expenses will be and adding to that any additional child care that will be needed because you aren't around and future college expenses of your children. Then add in your funeral costs, outstanding debts and a certain amount for unforeseen contingencies. From this total, you subtract your spouse's after-tax income, any Social Security benefits or retirement benefits your spouse receives or will receive, any assets and any other insurance coverage. This number is then multiplied on a number based on your age and the number of years your dependents will need to live on the proceeds. You can do the calculation easily with online insurance calculators or use an actuarial chart, which you also can find online. The result is a much more accurate amount of needed insurance.
Covering Your Spouse
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You and your spouse will have different insurance amounts. Don't assume if your spouse doesn't work that she doesn't need to be insured. For instance, if you have minor children, you will need to pay for a nanny or babysitter if your spouse dies, so her life insurance should be enough to cover such payments. Even if your spouse doesn't work and you have no children, her insurance should cover all of her funeral costs, at the very least.
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