How To Get the Right Amount of Life Insurance
This is a question that many of us have: just how much life insurance do I need?
There are a ton of answers out there, from 5 times your salary as a basic rule of thumb to complex equations that include your current debt load and the anticipated cost of your children's Harvard education. Many of the methods for determining how much life insurance you need depend on a level of prescience only claimed by those advertising 900 numbers for fortune telling.
It doesn't have to be that hard or that unpredictable. It does take some thought.
How much exactly will you purchase to ensure that your dependents are properly cared for? First of all, you have to review all your current debt. If you die, your debts should ideally be paid off. If you have young or non-working dependents, don't assume that the value of your estate should pay your debts; get them paid out through insurance. In this way, your family and its home is protected.
While I don't normally advise life insurance on your mortgage, it does guarantee that your home is paid off immediately, without any penalty. This can be a good move, especially if you have a non-working spouse.
Once all your debt is paid as a starting place, then you have to think about less-defined needs. How much does your spouse need in order to maintain your family's current lifestyle? Do you assume that you provide for 2-5 years, and then your spouse will have managed to increase his or her earnings to fill the gap? At the least, if you have young children, allow for an amount of money that will pay for child care expenses.
Include enough benefit to pay for your funeral and burial costs. No family should have to take out a loan to bury a loved one.
Do you have savings for your children's education? If you have a savings plan, you might want a benefit that would continue that savings plan for at least a couple of years. If you don't have savings for your children's education, include at least $100,000 for each child under 10. If your children are all over 10, figure out how much would be required to educate them now, and add at least that much to your insurance requirements.
You can probably see how financial advisors often say that you should have about 5 times your current gross salary. In most cases, that's about right although you may opt for a bit more or a bit less, depending on your unique situation.
Of course, you have to keep cost in mind. At my age (46), I find it expensive to try to keep the recommended 5 times my current salary in insurance. However, I do have at least a reasonable amount that would help my husband to pay off the mortgage, and ensure that he could get competent child care. However, I also know that his salary will continue to go up and his career options are many, because he's a programmer. So, I assume his salary will increase and that he'll do well.
One last thing to consider: life insurance by-passes the current tax laws, and allows your inheritor to receive a pay-out tax free. This money will also be paid out relatively quickly, whereas your estate could take some time to be settled. So, insurance can be the right way to go, in order to make sure that the people left behind will have the money to cope with immediate situation, without stress.
Looking for life insurance? There's lots of information on our site. Start your research with us. Then check out some of our site's sponsors for quotes.
Monique L. Attinger