Here’s a reliable rule-of-thumb when it comes to buying the right amount of life insurance: There is none.
While it’s easy for some so-called “experts” to say everybody needs life insurance protection equal to 10 or 20 times their income, the truth is everyone’s situation is unique and the amount you need can only be determined by looking at your individual circumstances.
Having the wrong amount of life insurance can be devastating for your survivors and “one-size-fits-all” recommendations can leave you under protected. In fact, according to a 2004 report by the life insurance industry’s research association LIMRA International, the average person is underinsured by more than $300,000. The study also found that 45 percent of widows (35 percent of widowers) say their spouse was inadequately insured. And one to two years after the death, half the widows and one third of the widowers are just getting by financially.
As you try to decide how much life insurance you need to reach your personal and financial goals, there are many questions you need to ask yourself. Here are just a few:
Is it important to ensure that your survivors — whether they are parents, siblings, spouses or children — can take care of their financial obligations after you’re gone?
Do you want to make sure those who depend on your income and support have the means to maintain their current standard of living?
Is it important for you to make certain your children will have the money to pay for a quality education even if you are not around?
How will your spouse cope with your death? Will he or she need to take time off to grieve after your death? Will he or she need assistance around your home? Will your spouse need counseling to recover?
Will estate taxes be an issue? Add up the value of your home, cars, investments, pension, 401(k), life insurance proceeds and other assets. If the total exceeds the lifetime exclusion amount, your estate may be subject to estate taxes. Life insurance can help replace assets that may be lost to taxation.