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How Much Life Insurance Should You Purchase?

iStock_000008633067SmallMost families realize the value of purchasing a life insurance policy, but many are confused about the amount of insurance they really need. No one wants to be under-insured, leaving their family possibly unprotected, but many are also wary of purchasing a larger policy than they really need and struggling to afford monthly premiums.

The easiest way to calculate the amount of life insurance you need to purchase is to first determine the annual income your family needs to remain comfortable. If your spouse works, then your life insurance policy needs to replace your portion of the family’s annual income if you hope for them to continue the same lifestyle they enjoy now.

The next step is to decide upon an amount which, when invested in income-producing financial vehicles, would produce the amount of annual income needed without having to touch the principle. Obviously, you would need to speak to your insurance representative or even a financial advisor to develop a reasonable financial strategy to meet this goal.

Planning to replace your current annual income is a good starting point for arriving at a base amount, but you may need to purchase additional insurance depending upon your goals for your family. Remember, replacing your current income is certainly a good idea, but you might also think about replacing the income growth you expect to see in the future. For example, a family with very young children is probably hoping to see income growth over the next decade, so that college funds can be established. Your life insurance policy would ideally cover not just current expenses, but future plans as well.

Also consider covering any expenses which would be difficult for your spouse to manage as a single parent. For example, if your job is the source of the family’s health insurance policy, you should budget for the cost of purchasing a new policy. If your spouse would need help with childcare or other assistance to live comfortably as a single parent, consider those expenses as well.

If the worst case scenario should indeed occur, you wouldn’t want your family saddled by the debt of funeral and burial costs. Funds to cover these events should be added to your final figure, so that your family will have the entire amount needed for living expenses after paying your final expenses.