There are several factors that you should consider when deciding on an appropriate amount of life insurance. Each person has different needs, but since you are reading this instead of meeting with me in my office, I’ll have to write in generalities.
How much do you make?
This will help you determine a couple of things; first, how much life insurance it will take to replace your income, and second, what your budget for buying life insurance should be. Any person who brings an income into their home that is used for paying for needs instead of wants should have between eight and ten times their earnings in life insurance. Simple equation then; Earnings * 8 or 10 = Life insurance needs.
This is just to start. Now if this is a single person, than the needs change dramatically, but for this article I will assume this is a family situation. Why would you need eight to ten times your earnings in life insurance? That is the amount it will take to replace your income indefinitely. Assuming your loved ones don’t splurge on a boat, or a new house, this amount should allow them to maintain their lifestyle as it was prior to your passing.
What debt do you have?
Anything you do offensively with your money should be protected defensively with life insurance. Bought a house? Took a loan to start a business? Purchased a car? Whether you are living or not, the cost of these items remain for a while. Why isn’t the eight to ten times earnings insurance enough to cover this also? If you bought between eight and ten times your earnings in life insurance as mentioned above, then most likely, there will be enough money to cover your debts, but then what is left? Let’s assume you make $75,000 a year. That means that you should have between $600,000 and $750,000 in life insurance. Throw the $275,000 mortgage that you have, along with your $20,000 car loan around $10,000 in credit card debt into the mix and all the sudden your generous death benefit is cut in half. Protect your family by having enough life insurance to cover these expenses.
What do you want to leave behind?
Do you believe in leaving a legacy? Some people do and some do not. If you want to leave a legacy, such as money to pay for your children’s college or helping them make a down payment on a house, then you need to calculate that also. The average cost at a public four year university is $6,585 per year for the 2008-2009 school year. That figure was more than a six percent increase from the previous year. If we assume a five percent increase annually, then you need to figure that for every year away from college that your child is, there will need to be a little more money. Here is an equation for your four year old; 5% * 14= 70%. This means that the cost of your four year old’s education may be $11,194.50 per year by the time they get to college. Make sure you have enough life insurance to cover this, if you want to do that for your children.
Buying life insurance isn’t fun. It costs money, and it makes you consider morbid possibilities. Rather than selfishly avoiding the situation because it costs a little, or because it makes you uncomfortable, please consider your family. Protect them, because you love them.