Life is full of risks. Some risks are ones that we are willing to take. That’s why I would like you to meet Lucas. Lucas is well aware of the risks of rock climbing. Rock climbing may cost Lucas his life. But let’s face it. It’s sheer fun to climb rocks. That’s why Lucas is willing to take that risk.
Nonetheless, he decided to offset the financial risk of his family by purchasing life insurance. Now, he is wondering how much life insurance he should purchase. Wondering if that would be enough to sustain his family if something happens to him. Stick around till the end of this article to learn about estimating the minimum amount of life insurance needed.
When you start thinking about purchasing life insurance, the first thing you want to consider is how much money is needed by your family. The face value of the life insurance otherwise known as the death benefit is chosen accordingly. Every family is different. That’s why the minimum life insurance needs are different from one family to the other. A good rule of thumb is to purchase between six to ten times your annual income.
You can also follow what is known as the standard living method. This method focuses on calculating the amount of money needed by the survivor to maintain their standard of living after the insured person dies.
You take that amount and multiply it by 20. The idea is that some of this death benefit would be used by the beneficiaries while the bigger part is invested to generate other streams of income. Other factors you need to consider after considering your family’s needs are debts, and income replacement. Life insurance can be used to pay off debts. Things like student loans, car loans, mortgages, credit cards, and personal loans can be a huge burden on dependents after death. So, you need to consider covering the entire amount of dept.
Don’t forget about interest rates and charges within the face value of your life insurance. The other big factor to consider when choosing the minimum amount of life insurance is replacing your income. Let’s say you are the sole provider for your dependents. Then you need the death benefit to act as a substitution for your annual income. Factoring for yearly inflation would also be a very smart way of thinking.
You need to grab a pen and paper for this one. Only then you can start doing some research on the top insurance companies in the US. Some of those companies provide very quick online quotes. This would give you a perspective on how much you would need to pay for the needed coverage.
Once you determine the required face value of your insurance policy, you can start shopping around. Many online insurance estimators can help you determine how much insurance you will need.