How Much Life Insurance Do You Need?

Consider how much your dependents will need to live on, as well as the coverage you already have.

It's a question you may have been avoiding. You might not want to think about your own mortality. Or it may be a case of information overload - too many products to consider.

If you don't have any dependents, the question is moot, according to the Consumer Federation of America, a non-profit association of approximately 260 pro-consumer groups. You only need life insurance once you are responsible for children or elderly parents.

If you have dependents, you need to consider what their financial future would look like if you died tomorrow. It's likely their security largely depends on your life insurance coverage. You should have enough life insurance to provide for your family as if you were still alive.

The exact amount you'll need to generate the ideal income depends on many factors.

If you are married, your partner may need to replace 75 percent of your income to maintain your current standard of living. If you earn $60,000 annually, for instance, enough life insurance to generate an income of $45,000 should help your spouse cover the cost of owning or renting your home, purchasing food, making car payments and so forth. If you are married and a full-time homemaker, you need to estimate how much it will cost your partner to buy services to replace the work you do.

Once you have reached an age where these major expenses are behind you, a policy that covers your final expenses, your partner's retirement plans, and your dependents' outstanding needs (for example, money to help a child finish college) should suffice. If you wish, you can also use an insurance policy to contribute to your favorite charity.

Consider the following points as well when you determine how much your partner and dependents will require to cover future expenses:

• Your final expenses. What will be the cost of your funeral, legal and probate fees, and taxes? Federal and state death taxes plus property taxes, all payable immediately after your death, can add up to 10 percent or more of your estate.
• Savings. Do you have enough in the bank to cover emergencies or to allow your partner to look for a job or go back to school?
• The amount of money you owe. What's the total of your mortgage, your credit card debt, your business loan and money borrowed from your best friend? You won't necessarily need enough insurance to cover all of these, but you should at least leave your partner enough to carry the debts.
• Your children's needs. Do you need to provide for day care costs, or a college education?
• Your partner's retirement. Would you like to leave your spouse a nest egg for his or her retirement?

Before you buy more insurance, take a close look at what you and your partner already have. You may have enough group insurance through your employer or professional association to cover most of your family's needs. Perhaps your partner is expecting a raise, a better-paying job or inheritance that will reduce your insurance needs.