Deciding on how much life insurance you need can seem like a daunting task or an extensive bit of math, but it is actually quite simple. In general, you should be able to find your ideal life insurance policy by calculating your long-term financial obligations and then subtracting your assets, not much different than calculating your net worth. Here are the things you should consider when making that calculation.
The average funeral costs $8,000 to $10,000. You also have to consider any other expenses such as unmet medical costs and taxes on your assets. Having this calculated into your policy will help your beneficiaries as they will have access to the fund much faster than if they waited for money from your estate.
Mortgage, loans, and debts
Add up all of your debts, how much you need to pay off your home and any other loans you may have. Covering these expenses in your policy will keep the burden off of your survivors and not force them to make difficult decisions.
If you have children that plan on going to college, it is a good idea to consider their education expenses. Consider the rising cost of college to decide how much is needed by the time they will be attending.
After you have all of your final expenses, debts and education covered, your family isn’t going to need to replace all of your income. What they will need is dependent on your lifestyle and future plans. Discuss the future now with your family.
Other benefits you may have
You need to take into consideration other accounts or benefits you have access to. Your 401k and IRA can be used after your passing as well. Your family can also receive federal benefits like the Social Security Survivors Benefits which provides funds from the Social Security taxes you have paid.
The simplest way to view life insurance is as a policy that would allow your family members to pay the bills and live their lives as planned despite your absence. Without going into all of the different types of policies available, you need to find the right fit with your current lifestyle. While buying life insurance does ask you to question your own mortality and focus on the future, you should never take a policy that would hurt your current financial situation.