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How much life insurance do I need?
To
decide how much life insurance to buy, you need to first
figure out what your goals are in purchasing this coverage.
Ask yourself the following:
- Do I want to spare my loved ones funeral costs and
outstanding debts?
- Am I concerned that my spouse or domestic partner will
not be able to continue to pay off the mortgage if I die
suddenly?
- Do I have dependents who count on my income?
- Am I concerned about college savings for my children or
retirement savings for my spouse if I die suddenly?
While all situations are different, here are two scenarios
to help you think through the questions you should pose to
your insurance professional:
Dependents
If you have children, a spouse who does not work outside the
home or aging parents who you financially support, you have
dependents. Alternatively, you may simply have a spouse or
domestic partner who would be unable to pay the mortgage
without your financial contribution. In either case, your
loved ones will no longer have your income to help them pay
the bills and maintain their lifestyle after you are gone. You
will have to purchase enough insurance to provide for their
future, while considering how much of your budget should be
devoted to life insurance.
Some insurance experts suggest that you purchase five to eight
times your current income. While this may be a good way to
begin estimating your family's needs, you will also need to
figure how much your dependents will need to pay for some or
all the following:
- Cost of owning a home (mortgage, maintenance, insurance,
taxes and utilities)
- College savings
- Food, clothing, utilities
- Child care
- Nursing home or elder care
- Retirement savings
- Funeral expenses and estate taxes
Your family may also need extra money to make some changes
after you die. They may want to relocate or your spouse may
need to go back to school to be in a better position to help
support the family.
No dependents
If you are young and plan to have a family in the future, you
may also want to consider purchasing life insurance now so
that you can lock in a good rate.
Just because you don't have dependents, does not mean you
don't have responsibilities. For instance, you may be
concerned with not being an economic burden to others if you
die unexpectedly. You may also want to leave some money behind
to close family, friends or a special charity as a
remembrance. In this case, you should purchase enough coverage
to pay funeral and burial expenses, outstanding debts and tax
liabilities, so that the bulk of your estate goes to your
family, friends or charities.
Your insurance needs will vary greatly according to your
financial assets and liabilities, income potential and level
of expenses.
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