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How Much Insurance Do I Need?

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.

Use our online
Life Insurance Needs Estimator

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.