Choosing the Right Amount of Life Insurance Coverage

By Rafael Onak, InsuranceAgents.com Staff Writer

To purchase or to not purchase life insurance coverage, that is the question? Unfortunately, after you’re done answering that question, you’ll be confronted with another: how much insurance do you need? Choosing how much life insurance coverage you actually need is imperative because your decision ultimately affects the price of your life insurance rates. Everybody has their own formula ranging from simple to the extremely complex calculations, so it’s up to you to find the one that works best.  The best starting point for anyone, is to compare life insurance rates from competing companies.  It save you tons, but also, it's easy and free, get your free quotes to compare now!

No method is perfect, so don’t get down on yourself if the one you initially choose doesn’t end up working.

Commonly used approaches to help you decide on an adequate amount of life insurance coverage:

1. Multiple of income. Also known as “human capitalization value,” this method multiplies your annual income between five to eight times to calculate the amount of life insurance coverage you need. It’s one of the oldest methods and is often mentioned by financial columnists in magazines.
2. Eliminate your debts. This approach entails only buying enough life insurance coverage to cover your mortgage, student loan bills or outstanding credit card statements. Since it avoids a whole range of factors, such as not considering any future debts or needs, this method can be very risky and should be taken with caution.
3. Human life value concept. The human life value concept deals with human capital, or an individual’s income potential. This method goes beyond numbers and considers the entire impact caused by the loss of a human life and the value to a person’s loved ones. Here are some questions that help in the process:
   • If you had been killed in an accident that someone else caused, how much would you want your family to sue the party for?
   • If you died of an illness last week, how much money would you want your family to receive?

Don’t Go Overboard with Your Life Insurance Coverage

Choosing the right amount of life insurance coverage can be an overwhelming process, especially if you aren’t too familiar with any of the methods. Although the three approaches mentioned in this article are the most popular, they have proven to be risky at times. Before you commit to a life insurance policy, contact a life insurance agent to gain a better understanding of how much coverage you actually need.

Published: Monday 12th October 2009