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How Much Life Insurance Do I Need?

How much life insurance you need may seem like a simple question, but calculating your life insurance needs can get complicated. There are many life insurance calculators on line that may help you get an idea of how much life insurance is the right amount for you. However, before you finalize your decision it is a good idea to meet with a qualified insurance agent or financial advisor. Preferably an independent agent or advisor that works with multiple companies and can help you get comparable quotes.

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Whatever amount of insurance you decide on and whichever type of life insurance policy you decide to purchase do not go with an insurer which is rated less the “A” by Standard and Poor’s.
The type of expenses most people consider when calculating the amount of life insurance their family may need include uncovered medical costs which may exist at the policy holder’s death, funeral expenses and substantial outstanding debts and mortgage balances. Life insurance proceeds can also be used to cover future family living expenses, provide money for college or provide your partner's retirement income, and much more.

Money Magazine suggests a good rule of thumb for how much life insurance you need is seven to ten times your annual salary. However, the magazine goes on to point out your family could need more or less, depending your family’s situation.
Some of the key factors are: What kind of lifestyle you want your family to have if you die. How much will your death affect the financial stability of your family? Will your partner to continue to work if you are gone or will they have to quit work or cut back on the hours they work to take on expanded family responsibilities? Do you want your family to be debt free? Will your family be fine without an insurance payout?

For example, if both partners are working and have no kids perhaps only enough life insurance to pay off all debts and leave the surviving partner debt free is the amount of life insurance you need.
It is more complicated if one spouse is a stay-at-home mom or dad. In that case the wage earner would likely want to have enough life insurance to cover current debts and to provide a sum to create an investment portfolio large enough to provide a desired annual income to the stay-at-home spouse. The amount needed for the investment portfolio will vary depending on other savings and investments, the age of the spouse and children and any retirement benefits that the surviving spouse may be entitled to at the working spouse’s death.

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Don’t get hung up on trying to do an exact calculation. It is really not important how accurate your estimate because things will change and in the end you’ll be over- or under-insured. However, too much insurance is expensive and if you are over-insured, you are paying a lot of extra money in premiums over the 20 year life of the policy so it is worth doing an approximate estimate.