Some financial advisors will tell you to multiply your annual income by a certain number, like 20. Others will tell you to buy only enough life insurance to replace the income you are expected to make between now and retirement. Some might recommend you buy only enough life insurance to cover your present debts.

The question "how much do I need" might not be the most useful way to approach the problem. The question you may want to ask is, "What do I want my life insurance to accomplish?" Then you can start to determine how much life insurance you'll need. Calculating your life insurance needs takes homework. It requires an individual solution, not a one-size-fits-all approach or a throwaway equation.

Why Do You Need Life Insurance?

This is a specific question, not a general topic. Think about why you're considering life insurance, or why you're considering an increase in the amount of life insurance you have. The most common reason for purchasing life insurance is to replace the income of a family member that others depend on. For that need alone, it's usually acceptable to multiply your annual salary by 20 and buy that amount of term life insurance for a period that will cover you until you retire.

If you have additional debts or obligations, you can consider adding those to the amount of insurance you need. However, keep in mind that debts and obligations like mortgages usually decrease over time, while a family's need for income replacement does not. If you and your spouse both work and are financially stable, it might not be difficult for your spouse to pay off a mortgage or debts, as long as you buy enough insurance to replace your income. If you're a single parent, however, you would probably need to purchase enough coverage to pay off all debts so that they're not passed on to your children.

Not Leaving a Burden

For some people, life insurance may seem too expensive, especially if they're just starting a family. If that's the case, it may make sense to initially purchase only enough insurance to cover your debts and obligations. Although you need to realize that it's risky to be underinsured, it's better that not having any life insurance. As your financial situation improves, you can usually purchase more insurance under similar terms.

For single people with no children, purchasing a small amount of life insurance can be an inexpensive way to cover debts and final expenses.

Additional Life Insurance Uses

Not everyone buys life insurance to replace income. If you're wealthy, have a large estate, or simply wish to donate to charity or establish a trust for your family, life insurance can be a smart purchase. If you have a large estate, you may want to consider buying a life insurance policy as a way to pay the estate taxes when you die. Otherwise, your family could be forced to sell off assets in order to pay the estate taxes. Life insurance could also be a good way to donate to a charity without paying taxes, or to establish a trust for your family or for philanthropic purposes.

Regularly Review Your Insurance

Because things change and it's impossible to predict the future, it's important to review your life insurance needs and coverage at least annually. If you make a change in your life, such as getting married, buying a larger house, or having children, your life insurance needs will probably increase. If your salary increases dramatically and your family becomes accustomed to a higher standard of living, your life insurance needs will also become higher. If you're certain of one of these changes before you purchase life insurance, make sure to include your expected circumstances in your insurance calculations.

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