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Ask yourself: How much life insurance should I have?

by Elizabeth on August 22, 2012

About This Week’s Action

Do you have life insurance? Or is getting life insurance something that’s been hanging out on your to-do list for far too long? Either way, this week’s post is for you.

Life insurance is well worth having for most people. And many folks, especially women, are underinsured. I could tell you sob stories about spouses who were left with tens of thousands of funeral expenses or kids left behind who no longer had someone to take care of them while the other parent worked. But I’m not going to. Because you know that you need life insurance and I don’t think guilt will be the triggering factor that helps you finally get proper coverage.

Instead, whether or not your have insurance, this week’s action step will help ensure that when you die, your family will not suffer financially.

Why ask yourself “How much life insurance should I have?”

It’s Easy
Determining the amount of life insurance you need is actually fairly simple if you ask yourself the questions in this post. There’s only a little math (but we’ll point you in the direction of a few good calculators).

You’ll Walk Away with a Concrete Next Step
Life insurance isn’t actually all that complicated, but some people feel it is. Instead of having you dive in and go out and buy life insurance this week, this week’s action is the first step in buying new or additional insurance. After you follow it you’ll know what to do next.

How Long Does This Action Take?

It will take you no more than 20 minutes to determine how much life insurance you need. Plus, if you have a spouse or partner you should weigh their opinion too. Add an additional 20 minutes.

How to Determine How Much Life Insurance You Need

1. Answer These Questions

  • What is the purpose of getting life insurance? Is it merely to cover expenses when I die or for a few years after? Or do I want life insurance to increase my family’s wealth?
  • How much money would it take to “replace” me and what I provide to the family? Even if you’re a stay-at-home parent, replacing all you do could cost your family well over $100,000 per year if you died.
  • For how many years would you want those expenses to be covered?
  • How much do you want to budget for funeral and probate costs? I recommend between $15,000-$20,000 to be safe.
  • Are there additional expenses you would want to fund? For instance, children’s education or paying off an entire mortgage?
  • Do you have additional debts that will take away from the value of your estate? This includes mortgages in your name, credit card debt, and some student loans.

2. Perform Your Own Rough Calculation

“Experts” recommend anywhere from 5-10 times your annual salary. Choose a few multiples in this range and see what numbers you come up with.

3. Try a Calculator

There are numerous life insurance calculators on the internet, here are my favorite 3:
Dinkytown Life Insurance Calculator
Life.org Insurance Calculator
SmartMoney.com Life Insurance Calculator

4. Make a Decision

Doing 1-3 above will give you 3+ different numbers. Now, you need to pick one. Ultimately, there is no “right” number. You should pick a number that you’re comfortable with. You don’t want to go to sleep at night worrying that you’re underinsured. Once you’ve determined how much life insurance you need you should either buy more coverage (if you already have a policy) or buy a new policy. Or perhaps you can drop some life insurance if it turns out that you are overinsured. (This frequently happens when kids leave the home or finish college. You don’t need as much life insurance anymore.)

Commit

You can read this post and say to yourself, “I’ll do that later.” But chances are you’ll get too busy. All of us will die someday. Let’s be prepared for it if it’s sooner than we think. So, instead of just telling yourself that you will do this, if you don’t have time to take action immediately, sign up to get a reminder.

When you register for free here, you’ll get an email reminder during the week reminding you to actually stop what you’re doing, take 20 minutes (or less) and ask yourself how much life insurance should I have?

This post was published as part of the Life Insurance Movement.

Elizabeth

About Elizabeth

Elizabeth is a freelance writer, ice cream lover, and new mom. She is the co-founder of Go Green Travel Green and writes for Wise Bread.

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