It’s important to opt for the right amount of coverage when purchasing life insurance. If you opt for too much coverage, you’ll be overpaying for your policy. On the flip side, if you opt for too less coverage, you’ll be leaving your loved ones without a financial safety net. Here’s a quick guide to determine how much life insurance coverage you should opt for. Read on.
How to Calculate Your Coverage
To determine your personal coverage amount, follow this basic philosophy: add up your financial liabilities and subtract your liquid assets.
Step 1: Add the following things to determine your financial commitments.
Your annual wage times the number of years you wish to replace that income
Your outstanding mortgage payment
Any other financial obligations.
Any future requirements, such as college tuition for your kids and end-of-life expenses.
Step 2: From the total you’ve obtained, subtract your liquid assets, like your savings, current life insurance coverage amounts, existing college funds, etc.
The number that you’re now seeing is the amount of life insurance you should get. Keep in mind that this is only a general guideline. You may need more or less based on your circumstance.
Tips for Calculating how Much Coverage You Need
Keep the following tips in mind as you go try to determine your coverage requirements:
Consider your life insurance plan to be a component of your entire financial strategy. The plan should account for future expenses, such as education costs, as well as the growth of your income or assets.
Don’t cut corners. Your annual income will most likely rise over time, as will your costs. While you can’t predict how much any of these will rise, having a cushion ensures that your family can continue to live their lives.
Discuss the figures with your family. How much money does your spouse believe the family would require to survive without you? Do your projections make sense to them? Choose a sum that not only works for you but also for your family.
Review the coverage every year. What you think is adequate today may not seem so ten years from now. Make sure to review your policy and the coverage every year and increase it if needed.
