Here's a reliable rule of thumb when it comes to buying the right amount of life insurance: there is none. While it's easy for some so-called 'experts' to say everybody needs life insurance protection equal to 10 or 20 times their income, the truth is everyone's situation is unique, and the amount you need can only be determined by looking at your individual circumstances.
Having the wrong amount of life insurance can be devastating for your survivors and "one-size-fits-all" recommendations can leave you under-protected. In fact, according to 2013 reports from Securian Life Insurance Companies and LIMRA, over half of households earning between $35,000 and $124,000 a year are underinsured; that's more than half of all total households in America.
As you try to decide how much life insurance you need to reach your personal and financial goals, there are many questions you need to ask yourself. Here are just a few:
Once you have determined your goals, there are many other factors that will have an impact on the amount of life insurance you need. Here are ten of them:
1. Age and number of family members
2. Blended families
3. Risk tolerance/investment objectives
4. Existing planning, savings, life insurance, investments, retirement programs or other assets
5. Current and expected income
6. Estate tax liability (current and expected)
7. Current health
8. Children with special needs
9. Expected inheritance
While this is not a complete list, it gives you an idea of the considerations that should be included in proper life insurance planning. The impact of these factors should also be measured in relation to each other.
Because there are so many considerations and everyone's situation is unique, answering the question of 'how much do I need' is not always easy. Many people become overwhelmed, and put off buying any life insurance, because they don't know how much they need, or what kind they should have. Meeting with a trained financial professional who understands your individual needs and goals can help you determine the right amount that makes sense for you.
The bottom line is this: having, or not having, the right amount of life insurance when you die can have a dramatic impact on those who depend on you. It is a personal decision too important to rely on a "one-size-fits-all" recommendation. Don't make the mistake of having the right amount of life insurance - for someone else's circumstances.
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