Here’s a quick quiz for you: Do you know how much life insurance you have? Do you have life insurance in addition to a policy your employer provides? If your answer to either question was “No,” then you need a life insurance audit to determine if you are adequately covered.

If you’re underinsured, you’re not alone. More than 46 million Americans are. That doesn’t mean being uninsured is a good idea. If sudden death strikes, your family would have to cope with catastrophic financial issues in addition to their emotional loss. No grieving family should have to struggle to pay the bills or have to sell real estate or securities prematurely because the family’s primary breadwinner died without adequate insurance.

The American Council of Life Insurers recommends, as a rule of thumb, that your insurance coverage equals five to seven times your annual earnings. That’s a good starting point, but many factors go into determining how much insurance you need.

Immediate Expenses

The most common immediate expenses that survivors have to pay when a loved one dies are medical bills and funeral expenses. Whether death occurs accidentally or after a lingering illness, survivors face bills for their loved one’s final illness and expenses for his funeral. Medical bills vary greatly based on the type of illness and how long the deceased was ill, as well as how comprehensive his medical insurance coverage was. Having enough life insurance to pay any uninsured medical expenses gives the family peace of mind in case the worst happens. Your insurance should also cover your funeral expenses, which typically range from $7,000 to $10,000.

Debt Repayment

How much insurance you need depends on how much you owe your creditors. Do you have a mortgage and a line of credit on your home? Is your car paid off? Do you carry a balance on your credit cards? Do you have a 401k loan? Are you still paying off student loans from college? If you’re not already debt-free, your insurance should pay as much of your debt as possible.

Plan for the future by paying down your debt now, and carry extra insurance until you pay it off. You can – and should – adjust the amount of life insurance you carry as your needs change over time.

Future Income

The primary purpose of insurance is to provide future income for your family. Even if you carry five times your annual income in insurance, your final medical expenses, your funeral expenses, and debt repayment can put a big dent in the amount of insurance proceeds your family has left to live on.

How much insurance your family will need for future income will depend in large measure on the size of your family, the earning capacity of your spouse, and your fixed living expenses. If you die with inadequate insurance and your spouse is not employed outside the home, he or she will have to search for a job after you pass away and pay for childcare for your children.

How much better it would be to give the family breathing room to deal with the tragedy of your passing and let your spouse get the education needed to supplement the income received from investing the proceeds of your life insurance. If you have enough life insurance, your spouse can care for the children, return to school and enhance his or her earning capacity without worrying about money.

Adequate life insurance will pay your debts and give your family the luxury of taking the time to grieve your passing instead of having to focus their thoughts on money.

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