It's not unusual for someone to tell me something like, "I need $100,000 20-year term policy." For some reason that seems to be the default amount of insurance people ask for, so when I ask how they arrived at that amount of coverage the answers are vague and varied.
"That's what my cousin has so I figured that's what I need."
As we all know, financial situations are like finger prints in that no two are the same. That cousin may be older, have less debt and a winning lottery ticket for all we know.
The purpose of buying life insurance is to make sure that your loved ones are in a good position if you were to die. The last thing we anyone wants is for your spouse and children to be left with a lot of debt and no way to keep the roof over their heads.
With that in mind, there are a few things you should consider when determining how much coverage you need.
- Mortgage debt. This is a big one because it is probably your household's largest expense each month.
- Other debt. Figure in car payments, credit cards and other debt.
- Final expenses. Have you considered how much it will cost when you die? The average funeral can cost between $10,000 and $12,000. Consider inflation as well.
- Costs associated with death and dying. Many people will have a hospital stay, which can involve deductibles and co-pays.
- Income replacement. If you are the main breadwinner in the house, your family will desperately need your lost income if you die. The car will need repairs and the refrigerator will have to be replaced eventually. Consider adding five years of your income to your coverage total.
- Education costs. There are those people who don't want their kids to take on student debt and want their life insurance to help pay for tuition. Using a college calculator can help determine this amount.
Chris Castanes is the president of Surf Financial Brokers, helping people find affordable life, disability, long term care, cancer, accident and other insurance coverages in North Carolina, South Carolina, Virginia, Tennessee and Georgia. He's also is a professional speaker helping sales people be more productive and efficient, and has spoken to professional and civic organizations throughout the Southeast. And please subscribe to this blog!