Insurance

How Much Life Insurance is Enough?

The answer to that question depends on a number of factors, including financial strength, debts, spouse’s earning capacity and what you need to fund. This means that before determining “how much,” you also need to ask “for what?”

Most people need to consider the following four areas:

Immediate needs:
Most people plan to pay off major debts in the event of a premature death.

Readjustment money:
Funds to cover needs such as job training, relocation or child care.

Replacement income:
The capital needed to provide income to help maintain a stanard of living.

Long-term special needs:
Providing for children’s education, wedding or other special needs.

Unfortunately, rather than looking at this total picture and making a plan, many people buy insurance piecemeal, obtaining a number of little policies over an extended period of time to cover mortgage debt, car and credit-card loans or to have more coverage when a new child is born.

The result of this approach is the likelihood of being over- or under-insured, and spending more money on less convenient arrangements. For example, credit life insurance on outstanding credit card or loan balances can be three times or more the cost of covering the same dollar amount with a term insurance policy.

It’s best to consult an insurance professional who can review your situation, keeping these points in mind:

• Most professional recommend that family bread-winners carry benefits equal to at least six times their annual income.
• A spouse who doesn’t work outside the home and cares for children, while not earning a wage, is expensive to replace with outside services (i.e., child care, housekeeping).
• It is not wise to rely solely on group coverage. If illness, layoffs or other reasons force termination of employment, health may have changed to the point of not being able to obtain adequate life coverage. Conversion of group insurance to an individual policy can cost eight times more than the same dollar amount of individual term insurance.
• Social security, in most cases, pays benefits to surviving children until age 18. The amount varies based on your average lifetime earnings, and the child’s age.

In short, life insurance should generate income to replace lost earnings. This can be done by reducing the need for income by paying off debt, as well as by providing the capital to generate a steady flow of income. Consult an insurance professional to help you develop a plan best suited to your family’s needs and circumstances.