Americans love insurance. We tend to buy insurance for just about everything from our vehicles, to our homes to our lives. This is not necessarily a bad thing. It often times makes sense to include a life insurance policy in your estate plan. When it comes time to purchase a life insurance policy though, how does an individual know how much insurance is really necessary?

How much life insurance you really need depends on why you want the life insurance. Is it just intended to pay off debts or must it support loved ones after your death? If the sole purpose of your policy is to pay off debts, the calculations are fairly simple; however, keep in mind that your debt load could change in the years to come so be sure to revisit the issue from time to time.

If you need the proceeds of your life insurance policy to support loved ones after your death, it gets a bit trickier to decide how much you need. One standard formula is to purchase ten times your yearly income. Although that may be a good starting point, don’t stop there. Consider things such as whether your spouse/partner will be working after your death, what standard of living you want your beneficiaries to have, and how long you need the funds to last. Most importantly, decide if you want your loved ones to live off of income generated by the principal or whether they are going to be using the principal. After considering these additional factors, adjust the amount of life insurance you include in your estate plan up or down accordingly.