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How Much Insurance Do I Need?
There are several different approaches to determine your insurance needs. The simplest and least accurate (therefore, the least preferred) method is to multiply the salary of the insured wage earner by a factor such as 5 to 10 (most use 7 as the average, e.g. $50,000/year x 7 = $350,000 coverage). This method yields a quick but inaccurate result since it does not take into account the number of children and their needs, current assets, and many other special considerations.
A better approach involves estimating your need based on the insured's annual salary, remaining period of support for dependents/beneficiaries, and other factors such as current assets and liabilities.
Factors to Consider
If you are not married and don't have any children, deciding how much
insurance coverage to buy may be a bit simpler than for people with large families.
Whatever your circumstances, though, it is important that you consider carefully
what might happen and what kinds of financial resources you'd like to have
available.
Here are some things to keep in mind:
- Loss of income. If you become disabled and cannot work, you will
need to replace your salary. Your employer may provide some disability
insurance coverage, but you should make sure that you know exactly how much coverage
you have and what limitations apply. Many disability insurance policies provide you
with about 60% of your current gross annual salary in case of a disability
- in part because most disability payments are not taxed. Be sure the
amount of coverage is enough for your needs. If it isn't, you may want to
purchase additional disability coverage. Look carefully, too, at the policy's
definition of disability and the timing of payments - do they start right
away, or is there a waiting period?
- Your health. In order to take the best possible care of yourself,
it is critical that you have health care coverage that allows you to see the
best doctors and provides access to any medications you might need. Be sure
to have basic health coverage. And it may be appropriate to take advantage of supplementary health insurance policies
such as vision and dental care insurance. Prescription drug coverage is
important. In addition, there are also specialized types of
health insurance coverage available, such as catastrophic risk coverage for
serious health crises such as cancer.
- Other people who rely on you. Do you care for an elderly relative?
Are you financially supporting a family member? If so, who will provide for
them when you are gone? If this kind of situation is a concern for you, it
may make sense to leave some money to provide care for these relatives.
One way to do this is to buy life insurance and to designate the people
you care for as the beneficiaries of the policy (or policies). When you are
gone, the policy would pay your beneficiaries in one lump sum or in the form
of an annuity, which would provide income over a period of time. Another
option is to purchase an annuity directly for them while you are still
alive. If the people you care for are not able to manage their finances, you
may want to consider establishing a trust, where professionals manage the
money you leave for the benefit of the people you designate as
beneficiaries.
- Charities or religious institutions you support. Perhaps you are
active in your church or volunteer in your community. These organizations
will certainly miss your contributions of time and personal energy, but they
will be grateful for the financial support you can provide in your absence
by making them beneficiaries of your life insurance.
- Repayment of debt. Perhaps you have a mortgage or college loan.
These are your responsibilities, and life insurance can repay these
commitments even after you are gone. Be sure to purchase enough insurance coverage to
repay the current balance on your loans.
- Final expenses. Death is a natural part of life. You will, of
course, want your family to be in a position to make thoughtful, comfortable
final arrangements for you. Consider owning enough life insurance to ease
the burden during what will be a difficult time for those who care about you
the most.
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