Determine your insurance needs
Hopefully, you now realize the importance of having the right type and amount of insurance coverage. The next step is to correctly determine how much and what type of life insurance coverage do you or your other family members need. Unfortunately there is no magic formula that works for everyone because your situation is unique to your circumstances.
So, how do you go about determining your specific insurance needs? Once again, the first step is to get educated. This will help you immensely in understanding the various types of coverage, and in identifying your general needs, or at least what aspects of coverage you don't need. Then you will be prepared to determine your actual insurance needs.
The good news is that there are plenty of resources available, especially on the Internet, that can help you determine your needs. For example, there are numerous websites with calculators. What you will discover, however, is that the results will vary from site to site, and rarely provide explanations or recommend changes. Remember that your situation is unique, while calculators are designed to address the needs of the average consumer. Still, comparing the results from different sites can help you in considering different scenarios. With what you learned during your education phase, you should be able to discern the best results.
Decide how much coverage you'll need
The amount of life insurance protection you should buy depends on many factors. You need enough coverage to replace the income your family would lose if you weren't around earning a living, plus to take care of any additional large costs, such as funding your kids' college educations, paying for a child's wedding or paying off loans and credit card debt, and possibly paying off the mortgage. These needs will be offset by your assets, basically how much you are worth. This could include the equity in your home, investments, savings, life insurance proceeds, social security benefits for dependent children, etc. Your family (spouse and/or children) may also be entitled to survivor's benefits from Social Security. These benefits will be based on your family situation, age, average earnings, etc. An estimate is provided in the Personal Earnings and Benefit Estimate Statement that you receive prior to your birth month every year. For more information and details, visit the Social Security website. Similarly, if you are a Federal worker, you may be entitled to other death benefits.
Once you have determined how much money your family will need, and subtracted your assets and estimated survivor's benefits (either from Social Security or the Federal Government), the resulting figure identifies how much total life insurance protection your family needs. This can then be compared to your current amount of life insurance coverage. One of the easiest ways to estimate how much life insurance protection you should have is to use a life insurance needs calculator. We have identified three calculators in the upper left column on this page. Each is somewhat different, so we recommend that you try all three and use either an average of the three results, or the highest value if you can afford it.
Pick your "term"
We assume that you have decided on term insurance which is usually offered in 5-year blocks ranging from 5 to 30 years. You also can buy annual renewable term which covers a one-year period and renews each year. Consider choosing a term that matches your need for life insurance protection. For instance, if your main reason for buying life insurance is to provide for your wife and children until they graduate from college in 15 years, you'll want to buy a policy with a term of at least 15 years. If you are purchasing any type of cash value policy, and it is not because of poor health in the family or as an estate planning tool, we implore you to reconsider.
Never buy more coverage than you need
The key to purchasing the right amount of life insurance is to have just enough coverage to meet your needs. If you have more life insurance than you need, you'll be paying unnecessarily for higher premiums. On the other hand, it's important not to have too little coverage, resulting in your being underinsured and putting your loved ones at risk.
My company provides enough life insurance coverage
Many employers offer their employees some sort of group life insurance. But this amount of coverage is usually not enough to adequately meet your life insurance needs. In addition, group life insurance policies are not portable, meaning that if you leave your job, or are laid off, you can't take your life insurance coverage with you. Carefully compare prices of your company policy versus independent insurers and make your best decision. If your company provides a certain amount of free life insurance, at least take that much insurance from your employer and consider another policy for the remainder of your life insurance needs.
If you still have questions, consider getting professional help. Once you have determined your specific needs, then it is time to begin evaluating your current coverage so that you can identify and make the necessary changes.
Step 4 - Evaluate Your Insurance Policies