Understand How Much Life Insurance Coverage You Need

Many people purchase their life insurance coverage for income replacement, mortgage protection, and/or to cover various expenses associated with the loss of a spouse such as medical or burial expenses, or counseling. While experts recommend that you purchase life insurance coverage five to 10 times your current annual income, this "rule of thumb" does not account for current assets or any special needs you and your family may have. Your life insurance needs will vary over time as your personal financial goals, needs and resources change.

Start With an Effective Life Insurance Coverage Plan

The starting point for an effective life insurance plan is to identify whether a risk exists and to define the financial impact of a premature death as a specific dollar cost. Several methods are used to quantify this amount.

Use the Simple Rule of Thumb

This method calculates your need for life insurance coverage as a multiplier of your annual salary or earnings. Five to 10 times earning is the simple rule of thumb. Clearly, this method is very simple; however. It does not allow you to address all of your individual financial goals. In addition, different advisors suggest different multipliers. This makes the calculation of a precise amount difficult.

Consider Income Replacement

This method focuses on the replacement of some percentage of salary or earnings for a specified period of time. The value of the income replacement can be calculated and compared to the assets you currently have. Any difference between needs and resources can be funded with life insurance.

While this method is not difficult to calculate, it may not adequately fund all of your financial goals if your present income does not fully represent these goals.

Evaluate Expected Financial Needs

This method focuses on the expected financial needs of the survivors, including: