How much life insurance should I buy?
This is a very tough question that gets asked all the time. The answer depends largely upon two factors: whether you a primary provider for dependents and whether you have any debts. If both of these apply to you, you might need life insurance to make sure your dependents are taken care of should anything happen to you (if you don't have coverage yet, find out what is The Perfect Age to Get Life Insurance).
Now, let's get to the numbers. To choose an adequate face value for your life insurance policy, you will need to look at two figures:
- Debt: If you have large debts, you will probably want to make sure that they are fully paid off by your life insurance policy when you pass away. Otherwise, your dependents may be burdened by your outstanding loans.
- Income: This is one of the biggest factors to look at when trying to determine how much life insurance you should buy. To make sure your dependents are provided for, you should plan on buying enough life insurance to replace your income given a 5-8% return on investment—plus a little bit on top to guard against inflation.
Let's say, for the sake of example, that you owe $100,000 in mortgage debt and that your dependents would need $400,000 to replace your income. So, just add those 2 numbers and you'll have a guideline for how much life insurance you should be buying. In this case, $500,000.
Of course, price and affordability also come into play here, since a larger life insurance policy would obviously require you to pay a higher premium (find out What Influence Life Insurance Premiums).
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