A:

There are many factors to consider when calculating life insurance. Some of those factors include marital status, dependents, earnings of each spouse and how much time they have left to work. With life insurance, you want to avoid a situation where the insured is either under-insured or over-insured. Under-insuring means that there will not be enough money left over for loved ones and over-insurance is a waste of money in the unlikely event of a death.

Most insurance companies say that a rule of thumb for life insurance is six to 10 times the amount of annual salary. Another way of calculating the amount of life insurance needed is to multiply annual salary with the number of years left until retirement. For example, if a 40 year old man currently makes $20,000 a year, under this approach, the man will need $500,000 (25 years * $20,000) in life insurance. Many life insurance companies and advisory firms offer free life insurance calculators for customers to use to figure out what amount is the right amount for them.

Regardless of the source of the estimate, life insurance must be enough to replace the earnings of the deceased. In other words, the amount of life insurance taken out should be enough to replace the earnings gap that will be left behind when the breadwinner is gone and any additional expenses that might be incurred (estate tax preparation fees, etc).

To learn more, read Bundle Your Insurance For Big Savings.

This question was answered by Chizoba Morah.

RELATED FAQS
  1. What are some examples of when insurance bundling is a bad idea?

    Learn about situations where insurance bundling may not be a favorable option. Bundling insurance is often a good idea, but ... Read Answer >>
  2. What is the difference between the death benefit and cash value of an insurance policy?

    Understand the difference between the various components of a life insurance policy including the death benefit and a policy's ... Read Answer >>
Related Articles
  1. Financial Advisor

    Is Life Insurance From Your Employer Enough?

    Covering the needs of the ones you would leave behind is not easy. But efforts to secure a life insurance policy outside of work should pay off.
  2. Insurance

    Finding the Right Life Insurance

    Learn how to determine the type of life insurance you need and use our calculator to find out how much coverage you should have.
  3. Insurance

    Tips for Helping Clients with Life Insurance Needs

    Life insurance needs will likely change over the client’s lifetime and again financial advisers can provide an objective sounding board.
  4. Insurance

    Life Insurance

    Life insurance is an important component of basic financial planning. Find out how life insurance works and how insurance companies are able to profit through providing financial security to ...
  5. Insurance

    Term Life Insurance: Everything You Need to Know

    Term life insurance is an affordable way to financially protect your loved ones after your death. Here's what you need to know before purchasing a policy.
  6. Financial Advisor

    Getting Life Insurance in Your 20s Pays Off

    Find out how Americans in their 20s can benefit from a well-thought-out life insurance policy, especially if they are able to build cash value for retirement.
  7. Insurance

    How Much Life Insurance Should You Carry?

    Learn how much - if any - insurance you really need.
  8. Insurance

    When Life Insurance Isn't Worth It

    So, you're thinking about buying life insurance, but do you really need it?
  9. Insurance

    Millennials Guide: Too Young for Life Insurance?

    Unless you have kids, it's easy to think you don't need life insurance Here are the reasons why you might– as well as which type and how much to get.
RELATED TERMS
  1. Whole Life Insurance Policy

    A life insurance contract with level premiums that has both an ...
  2. Life Insurance

    A protection against the loss of income that would result if ...
  3. Key Person Insurance

    A life insurance policy that a company purchases on a key executive's ...
  4. Variable Life Insurance Policy

    A form of permanent life insurance, Variable life insurance provides ...
  5. Universal Life Insurance

    A type of flexible permanent life insurance offering the low-cost ...
  6. Insurance Industry ETF

    A sector-following fund that invests primarily in insurance companies, ...
Hot Definitions
  1. Trickle-Down Theory

    An economic idea which states that decreasing marginal and capital gains tax rates - especially for corporations, investors ...
  2. Derivative

    A security with a price that is dependent upon or derived from one or more underlying assets.
  3. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  4. Sharpe Ratio

    The Sharpe Ratio is a measure for calculating risk-adjusted return, and this ratio has become the industry standard for such ...
  5. Death Taxes

    Taxes imposed by the federal and/or state government on someone's estate upon their death. These taxes are levied on the ...
  6. Retained Earnings

    Retained earnings is the percentage of net earnings not paid out as dividends, but retained by the company to be reinvested ...
Trading Center