How much life insurance do I need?
The question of how much life insurance one needs tends to confuse people. But the reason it tends to confuse them is that they don’t like to think about it. When you are thinking about life insurance, you are thinking about your own death. You are thinking about leaving your beloveds behind and being separated from them. And–life insurance is boring, isn’t it?
So, people tend to avoid thinking about life insurance. When a life insurance agent or financial advisor does a financial needs analysis with them, they often don’t really pay attention because they think the premiums for the recommended amount are too high (and they don’t want to pay for “air”), or they suspect that they and the agent have a conflict of interest–so they see the agent as a kind of enemy who is trying to make them take more life insurance than they really need, so that the agent can make more money for himself.
Unscrupulous salesmen in all industries and life insurance scandals that make big headlines have poisoned the well of people’s minds. And while it’s true that one can always find dishonest people who would try to take them for a ride and rip them off, the fact is that most financial professionals just want you to have the right amount of life insurance coverage–and, most people don’t have it. Most people who have life insurance at all have too little, not too much.
But what’s the right amount?
The amount of life insurance you need first depends on whether you need it at all. Now, if you’re out of school and working professionally, the odds are that you do need it. And it’s important to know this because the younger and the healthier you are when you buy life insurance, the lower your premiums are for the face amount you need. However, having said that, if you are 25 and working but you’re single and have no children and are renting a studio apartment, you may have a justifiable case for needing $0 worth of life insurance.
Yet, some day, you probably are going to need it. So, let’s assume that day is today. What things will you have to consider?
- Do you have a mortgage?
- Do you have any other large outstanding debts?
- Are you married or involved in a serious romantic relationship?
- Do you have children, either of your own or whom you are responsible for?
- How much money do you make?
- How much are your total assets worth?
- What do you reasonably plan to have as income and assets 10 years from now?
- Do you own your own business?
- Are you a “key man” in a business?
- How old are you?
All of these factors need to be gone over with a professional financial advisor or planner. But, the general rule of thumb is this: if you are married and/or have children, you should have anywhere from eight to 20 times the amount of your current annual income as your life insurance face value. What this means for you is that if you make $50,000 a year, you need anywhere from $400,000 to $1,000,000 of life insurance. You see, those who survive you will likely need to do more than just pay for your funeral. They will need to have a large sum of money to invest safely and draw income from to replace your lost money making ability.
How much life insurance do you need? That’s personal. But, if you are like most people, you are under-insured.
