I’m asked this often and I find that most people greatly underestimate the amount their family would really need if they were to die prematurely. Some things to consider when trying to figure out what amount of life insurance to buy:
1) What kind of lifestyle do you want for your loved ones should you die?
2) How much money will they need to continue to live in their current lifestyle?
3) How much money will they need to cover all debts/future expenses (mortgage, college, etc)?
Some financial planners or insurance agents may tell you a good general “rule of thumb” is to consider and amount of life insurance equal to about 7 to 10 times your annual income.
Depending on how many dependents you have and if you have good investment accounts or other money/assets that could be liquidated upon your death to help provide income to your family in the future, then you may need a lot more or less insurance than 7- 10 times your income.
While immediate final expenses, burial, etc., can cause a financial strain, the big financial problems usually occur in th future because your family loses your income forever.
Considering life insurance to be used as income replacement, see what each lump sum payout below would provide as annual income to your family if they had to replace your income in the event of your premature death. Assume they could earn a 5% annual net interest rate on each lump sum of money and there would be no money left at the end of 20 years. These are only examples:
$100,000 would provide $7,642 per year for 20 years
$250,000 would provide $19,105 per year for 20 years
$500,000 would provide $38,211 per year for 20 years
$750,000 would provide $57,316 per year for 20 years
$1,000,000 would provide $76,422 per year for 20 years
$1,500,000 would provide $114,632 per year for 20 years
$2,000,000 would provide $152,844 per year for 20 years
The above may help you to better determine the best amount for you to purchase if you think of life insurance as income replacement.
If you’d like a more exact way of determining your specific life insurance needs, go to http://www.lifehappens.org/life-insurance-needs-calculator/ and input your specific info. This is the best life insurance needs analysis calculator that I’ve ever seen.
If you do have health issues like diabetes, heart disease or any other issues that may cause you to pay more for life insurance, buy as much as you can afford and that fits your budget. Having any life insurance is better than having none.
Some insurance companies will issue low amounts like $50,000 or even $25,000.
Keep in mind though that many insurance companies have a price break at amounts of $250,000 and higher. So you pay less per $1,000 with some insurance companies for policies at $250,000 or higher amounts.
So in some cases, rates at $250,000 will cost the same or even a little less than rates at $200,000. Even $150,000 may not cost that much less than $250,000.
So if you think you can only afford low amounts of life insurance, at least check out rates at $250,000 as you may be surprised that it may not cost as much as you’re expecting.
While it would also be nice to lock into a longer duration guaranteed level rate like 20 years, 25 years, 30 years or longer, if one of these doesn’t fit your budget, buy a 10 year term plan as 10 year term will be one of the most inexpensive term insurance plans you can buy.
If you can afford the perfect amount of life insurance for the exact time frame that you need it, then you should buy that perfect plan that will be best for your loved ones.
Many things in life are not perfect and your life insurance strategy is one more thing that does not have to be, but buy what you can afford as any amount will help if you die prematurely.