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How much life insurance should you buy? The answer to that
question is as individual as your circumstances. You'll need to
evaluate the reason you're buying life insurance in order to
properly answer this question. Once you can specifically answer
the question "Why am I buying life insurance" you should be a
long way towards determining a proper amount.
The biggest pitfall most people make in deciding how much life
insurance they need is in treating this purchase as an emotional
decision. Life insurance is a financial product and should be
treated as such. Looking at an amount of life insurance and
thinking 'that's too much' can leave you drastically
underinsured, and worse, leave your dependents without enough
coverage in the event of your death.
The second most common pitfall in determining the amount of life
insurance you need is using insurance to cover debt. While
initially one might be tempted to 'cover your mortgage' this
goes against the premise of insurance which is to insure against
a loss. Instead you should be looking at what you loose
financially upon your death.
As noted above, the first question you need to ask yourself is
'why am I buying life insurance?'. For most of us with
dependents and a debt load the reason behind purchasing life
insurance is so that our dependents can maintain their lifestyle
in the event of the death of an income earner. In short, most of
us are looking to maintain a standard of living for our
dependents in the event of our death. That's the need and
directly leads us to the answer of how much life insurance we
need.
So you want to maintain your dependent's standard of living in
the event of your death. How are you maintaining your current
standard of living? Again for most of us, that's done through
our paycheck or our income. You are maintaining your standard of
living through your income - you're paying your mortgage and
other debts, buying groceries, and all the other necessities
involved in daily living. If you should die, you lose your
paycheck - and consequently the ability to maintain your
dependents' standard of living.
Very directly, the easiest way to ensure that your dependents
maintain their standard of living is to provide a replacement
paycheck upon your death. And with that number (your income that
needs to be replaced) an insurance agent can easily calculate
how much life insurance you'll need to provide a replacement
income.
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