While traditional wisdom says to buy 5-10 times your yearly income worth of life insurance, you might balk at the idea of buying $500,000 worth of coverage when you only make $50,000 a year. To maintain a healthy budget, you might decide to purchase significantly less—which could put your family at risk later. Here are two things you should think about before you shop for life insurance so that you choose the right policy for your situation:

1: Future Income Potential

If you are like most people, your financial portfolio might consist of more than just your checking and savings accounts. Unfortunately, if you forget to factor in other forms of future income or loss, you might miscalculate your life insurance needs. Here are three things to figure in to the equation:

  • Investment Properties: Do you own rental properties, vacation homes, or timeshares? If so, you might spend money each year maintaining those properties and they could be sold later for a profit. As you calculate life insurance, don't forget to factor in potential profits for sold estates and losses due to property damage.
  • Stocks and Bonds: Don't forget about your stock portfolio as you calculate life insurance. Although it might be impossible to predict what that stock will be worth, think about the maturity dates for your bonds. If you know that your survivors will be able to cash out a few years down the road, they might not need as much money in life insurance. 
  • Career Opportunities for Family Members: As you think about your family members, consider their ability to financially recover on their own. Has your spouse's old boss been begging them to come back to work, or have they relied on you for support for years? If your family members are financially independent, you might not need to buy as much coverage.

If you do the math and figure that you need more insurance than you currently have, don't despair. Most people think insurance is much more expensive than it really is. In fact, according to one study, the typical American thinks that a 20-year, $250,000 policy for a healthy 30-year-old costs about $400 per year. However, in real life, a policy like that would only cost about $150 per year, or about $12.50 per month.

2: Familial Spending Habits

Calculating your potential income gains and losses won't matter much if your family can't stick to a budget in the first place. Before you sign up for an insurance policy, take the time to think about your familial spending habits. Here are a few things to look at:

  • Overdraft Accounts: Is your checking account constantly running dry? If so, your family might have a bad habit of spending more than they earn. If this is the case, you might want to think about increasing your overall life insurance coverage or talking to your family about toning down the spending.
  • Credit Card Usage: Do you rely heavily on your credit cards for support between paychecks, or do you have cards to build your credit? Think about the total number of credit cards your family uses and whether or not the balances are kept in check.
  • Ability to Save: Does your family have a savings mindset or a penchant for spending every dime they earn? If your spouse can switch into "economy" mode when funds run low, your family might be able to make do with a reasonable level of life insurance. However, if saving is a challenge, a larger policy might suit their lifestyle a little better.

To choose a policy that everyone will be happy with, think about holding a family discussion about life insurance. Explain to your family that if you were to pass away, they might find themselves living on a fixed income. By being upfront about your choices, your family members might be able to adapt a little better down the road.

By carefully analyzing your situation, you might be able to protect your family—no matter what the future holds.