How Much Life Insurance Do I Need?
The amount of life insurance you decide to buy depends on your projected final expenses and your family's anticipated financial needs in the future.
Typically, if you have no dependents and have enough money to pay your final expenses, you do not need life insurance.
However, once you have dependents you should buy enough life insurance so that, when combined with other sources of income, it will replace the income you now generate for them, plus enough to offset any additional expenses they will incur replacing services you currently provide.
Your family might also need extra money to make lifestyle changes after you die. For instance, they might want to relocate, or your spouse might need to go back to school to be in a better position to support the family.
Most families have sources of post-death income besides life insurance. The most commone source is Social Security survivors' benefits. Many also will have life insurance through thier employer. Also, some others might have protection from other affiliations, such as membership to an association or a credit card. Although these sources do provide income, it is rarely enough.
Multiple of Salary Recommendation?
Some experts recommend buying term life insurance or whole life insurance equal to as much as 20 times your salary before taxes. If the benefit is invested in bonds that pay 5 percent interest, it would produce an amount equal to your salary at death, therefore the survivors could live off the interest and would not have to dip into the principal.
This is a simple formula and it does not take inflation into account. It also assumes that one could put together a portfolio that, after expenses, would provide a 5 percent revenue stream every year. Let's assume inflation is 3 percent per year, the purchasing power of a gross income of $75,000 would drop to about $57,500 in the 10th year. To avoid this income drop-off, your family would have to tap into the principal each year. If they did, they would run out of money in the 16th year.
The "multiple of salary" approach does ignore other sources of income, such as those discussed above. These benefits can be substantial. For example, for a person who had been earning a $36,000 salary at death ($3000 a month), maximum Social Security survivors' monthly income benefits for a spouse and two children under age 18 could be about $2,300 per month, and this amount would increase each year to match inflation.
In this example, the survivors would only need life insurance to replace only $700 per month of lost income. These survivors would need life insurance to replace about $1,150 per month,once the non-working surviving spouse has only one child under 18 in her care, and the surviving non-working spouse would have to replace the entire $3,000 once the youngest child turns 18.
The bottom line is that the amount of life insurance you need depends on your family, financial and marital status. Once you have dependents, you definitely need to obtain insurance coverage. It is probably best to seek the advice of a qualified insurance agent when you are ready to ask about getting a life insurance quote.
seek the advice of a qualified insurance agent when you are ready to ask about getting a life insurance quote.