How Much Life Insurance Should One Have?
When you decide it's time to buy a life insurance policy, the most basic question a person asks is "How much do I need?" Thankfully, there are a few simple guidelines that you can use to determine how much life insurance you need to help and/or protect your family if you die prematurely.
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What You Need Life Insurance For
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While many experts have many different, but related, specific theories and ideas about why you need life insurance, the overriding principle is to protect your income in the event of your death.
How A Life Insurance Policy Fulfills Its Intended Purpose
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The two most common ways are by providing what's called "pure insurance protection" and the other is by helping you self insure (this is more commonly known as cash value insurance). Both types of policies accomplish the same goal, but use different methods to help you meet your goals.
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How Much Life Insurance Should You Buy?
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The amount of life insurance--or death benefit--you should buy depends on your income and debt. Add all of your debts and look at your spouse's income. If you were to die, you need to leave enough money for your family to pay off debts and live comfortably on your spouse's income alone as well as pay until the kids are adults.
Calculating Income Needs
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When calculating income needs, take the amount of income needed annually and divide by 4 percent to assume a rate of return that an income producing investment could realistically yield. Since income producing investments tend to be lower risk and offer lower--but more stable--returns, you probably do not want to adjust the assumed interest rate higher than 5 percent.
How To Do The Calculations For Buying Life Insurance
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If your spouse would need $10,000 per year in income if you died tomorrow, then you must divide $10,000 by 4 percent. In this case, to provide $10,000 a year in income, you would need $250,000 worth of life insurance not counting inflation.
Dangers Of Buying Too Little Or Too Much Life Insurance
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Many people do not "overbuy" life insurance. However, they do tend to buy too little. Point blank: If your life insurance policy is not enough to make your spouse's life comfortable if you died tomorrow, then you do not have enough.
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