Take a look on the Internet for resources about choosing the amount of life insurance you need to take out, and you'll find some fairly standard answers, but also a lot of ambiguity. Figuring out how much life insurance to get is a fairly complex decision, and one that varies on a case-by-case basis. Still, just like with other kinds of financial management, industry experts have weighed in on what they feel is best for the average consumer.
One of these rules of thumb is that many suggest taking out 5 to 10 times a person's salary. To many of us, that sounds like a lot. It's only when you get into the details of figuring out how people use money over time that you realize 5 to 10 times salary can actually be a pretty conservative estimate.
One of the most basic ideas about life insurance is that you need enough to last a certain number of years, when your salary won't be coming in. This involves calculating a person's ‘time to retirement’ and how much money they are projected to earn in the next 5, 10, 15, 20 or more years.
Another way to put this is that you can try to figure out how much the household will have to deal with in terms of expenses each year, and multiply that by the number of years you'll need coverage for. This is a fairly straightforward way of doing life insurance calculations. For a better idea of how to do this kind of research, take a look at resources like this Life Insurance Calculator from Bankrate, a company dedicated to exploring all of the various aspects and avenues of financial management for the average family.
There's another interesting idea that a lot of experts have put out there -- the idea that if you get a big enough potential payoff, a family will live on the interest for a long time.
Take a payout of an even $1 million. Using a very simple calculation, you'll find that at 5% interest, that million dollars would generate $50,000 per year. Then take a look at your current stock market, trust fund and investment fund opportunities, and see whether you can get something close to 5%.
After adjusting for market circumstances, you can figure out how the household might achieve capital gains on a policy payout that's roughly even with the projected salary. Get more detail at Investopedia, and more about different policy options.
Another major issue is the age of dependents in your household. For example, if your two kids are 15 and 17 years old, you may only want a few years of coverage. On the other hand, those with new babies and toddlers, who are often some of the most motivated life insurance customers, will want policies that provide for at least a decade or more.
All this is to suggest that when it comes to life insurance, you may need more than you think you do. Of course it's all a gamble, but with the low premiums of most policies, it kind of makes sense to get an amount that's really going to pay off if it's needed. After all, that's just what this is -- insurance.
Talk to a qualified insurance broker to figure out how to get the coverage you need at prices you can afford, and without major hassle in scouring the markets and talking to the busy customer service departments of a range of carriers.