There are really only a couple of reasons to get life insurance.
If you have a family with young kids (like I do) you want to ensure that your children and surviving spouse can maintain their current lifestyle should something terrible happen to either spouse. In this case both my wife and I have life insurance coverage.
And if you want to protect and preserve your estate and pass a legacy on to your children, then you might consider life insurance when doing estate planning since it provides your estate with a tax-free, liquid asset.
In either case, the question most often asked is “how much coverage is enough?”
And the short answer is… that depends.
Three ways to determine coverage for income replacement
In this article I’ll focus on the first (and probably more common) case of getting life insurance to replace lost income. This is typically the most important reason to get life insurance if you have, or are planning to start, a family.
In this case there are 3 ways for coming up with an idea regarding how much coverage you might need.
- Multiple of your annual income
- Pay off debts and retirement
- Enough to replace lost income & retain your lifestyle
Let’s explore each one in greater detail…
The simplest method to understand is to use a multiple of your annual income is the amount of coverage to get. For example, based on your age (and earning potential) a multiple is used – such as 10 times or 20 times your annual salary – to determine total coverage.
Sounds simple, right?
It certainly is.
And though some coverage is better than none at all, this method is the least accurate for determining just how much coverage is enough for you and your family.
Another approach focuses on how much money is required to pay off all your outstanding debts. In fact, if you recently purchased a home or refinanced you have you probably received life insurance offers in the mail sent to your mortgage company.
The focus is based upon an assumption that if all of your bills were paid less “maintenance” income would be required for your family. And of course there is some truth to this.
Additionally, you can add in a certain amount to cover lost opportunities for saving for your retirement.
This approach is certainly better than the first one listed above because it covers your outstanding debts – and therefore your families need to pay these debts off in your absence. It does fall short, however, and one key point: it ignores the need your family will have some liquidity.
Finally, you can analyze how much annual income is required to maintain the lifestyle of your family.
For example, if you look at your current expenses – including outstanding debts – as a guideline then you can calculate the lump some that is required to generate a yearly income stream equal to your overall expenses.
So which method is right you?
I’m no insurance expert so I can answer that question for you. What I can say is it certainly makes a lot of sense to speak with an agent about your specific situation.
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With more than 65 years of experience and a highly trained, service-focused staff, Bruen Deldin DiDio Associates Inc. is one of the New York’s leaders in insurance services. You can reach an experience agent by calling them at 800-660-6934, or visit them online for more information about life insurance.
After all, the choice is yours…