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How Much Life Insurance Should You Have?

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Calculating the right amount is key to protecting your family’s well-being.

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Life insurance is an essential part of any financial strategy: It replaces your income to help protect your family in the event of your death. But how much coverage is enough?

You can get a ballpark idea of the coverage you need by using a multiple of your salary. One common rule of thumb is to purchase between five and 10 times your annual income. So, if you make $75,000 a year, you might consider buying a $750,000 policy.

Marvin Feldman, president and CEO of the LIFE Foundation, a nonprofit group that provides consumers with information about insurance products, suggests an approach that is more tailored to your personal circumstances:

Add up your financial obligations.

“First, think about who depends on you financially, including your spouse, children and other loved ones,” says Feldman. “Then add up how much money they would need to maintain their current standard of living and to pay for any future plans like college for each child.”

Also ask yourself how much money your family would need to meet immediate expenses, such as funeral costs, taxes and debts.

Consider insuring a stay-at-home spouse.

One of the biggest misconceptions about life insurance is that you don’t need it if you’re not the primary breadwinner. Replacing child care, cooking, cleaning, transportation and other tasks performed by a spouse who doesn’t work outside the home could be expensive. “You must think about whether your spouse could afford to pay someone else to provide these services in your absence,” says Feldman.

Think about the kids.

You may assume that you need insurance only while your children are living at home. However, a recent study found that 48 percent of adults ages 40 to 59 have provided financial support to at least one grown child in the past year, with 27 percent providing the primary support for that child.1

“The ‘First National Bank of Mom & Dad’ does not close just because the children have moved out,” Feldman says. “If Mom and Dad are no longer here, insurance may be the only source for the ongoing support of these children.”

Do the math.

Add up your current savings and any other assets or sources of income that your family could use to meet its financial obligations, then compare that figure to the total financial need you calculated above. The difference between those two figures is a good estimate of how much coverage you need.

“Should something happen to you, you want to make sure the bills will be paid, your children’s education will stay on course, your business will continue to flourish, and that your spouse will be able to retire comfortably,” says Feldman.

For a more detailed analysis of your life insurance needs, consult a financial advisor, who can help you consider a broad range of factors and issues specific to your circumstances.

1 http://www.pewsocialtrends.org/2013/01/30/the-sandwich-generation/

This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

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