Buying life insurance has become more common for the average consumer, but many people aren’t aware of the different types of policies and how much life insurance is really needed. Life insurance is a financial instrument that can help you protect your loved ones in the case of your death. Ideally, you want to ensure that your beneficiaries are financially secure after your death. On the other end, this can also be a cause of financial stress if you don’t have enough life insurance. If you’re wondering how much life insurance you need, read through the following article for some useful tips and advice.
What is life insurance?
Life insurance is a contract that provides protection against a person’s death by paying a specified amount of money to a beneficiary. The money that the beneficiary is entitled to receive is called the death benefit. It is important to note that life insurance is not a substitute for your other financial assets. It is simply a way to protect your financial future in case something tragic were to happen to you.
How much life insurance do you need?
The USAA Life Insurance Company states that “[at] a minimum, you should have enough coverage to pay off any debt you have and replace your salary for at least five years.” Thus to determine the minimum amount of life insurance you will need to start off by adding your financial obligations and then subtracting your current assets.
How to calculate how much life insurance you need
Let’s take a closer look at how to calculate your life insurance needs.
- .Step 1: Add up your debt – This includes the amount you currently owe on your home, student loans, credit card debt and any other debt you may be in.
- Step 2: Add 5 years of Income– This includes both your salary and any other forms of income such as pensions and Social Security benefits for the next 5 years.
- Step 3: Add future financial obligations you will like to cover – This can include things like paying for your kids’ college, and the costs associated with your funeral. Other things to take into consideration includes your homeowner’s insurance and auto insurance costs, grocery costs, and other expenses that your family will face in your absence.
- Step 4: Subtract your assets – This includes any savings you currently have in the form of saving and checking accounts, stocks, bonds, and other investments.
Here is an example:
Conclusion
Life insurance can be confusing, but by following the above tips presented in this article you should be able to purchase the right amount of coverage for your unique financial situation. Various types of life insurance plans exist. Our Bloomfield Hills based insurance agency can help you purchase the right amount of life insurance coverage for your unique financial situation. Give us a call at 248-362-1313 or fill in the form below.
