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 the main factors that impact share prices in the insurance sector?

    The main factors that impact share prices in the insurance sector are interest rates, earnings and actuarial risk. In the ... Read Full Answer >>
  2. Why do insurance policies have deductibles?

    Insurance policies have deductibles for behavioral and financial reasons. Moral Hazards Deductibles mitigate the behavioral ... Read Full Answer >>
  3. Which emerging markets are seeing the strongest growth in the insurance sector?

    The emerging market economies seeing the strongest growth for the insurance sector are primarily the main emerging market ... Read Full Answer >>
  4. How do insurance companies use a whistleblower?

    Fraudulent claims are among the most prevalent and serious business risks that insurance companies face. Many consumers have ... Read Full Answer >>
  5. How is maintenance of standard of living for survivors accomplished in estate planning?

    Estate planning is an integral component of comprehensive financial planning, as it allows individuals and couples to maintain ... Read Full Answer >>
  6. What options strategies are best suited for investing in the insurance sector?

    Three segments comprise the insurance sector. The largest, property and casualty insurance, exhibits significantly less volatility ... Read Full Answer >>
Related Articles
  1. Insurance

    Who is a Beneficiary?

    A beneficiary is a person or entity that receives funds, assets, property or other benefits from a trust, will, or life insurance policy.
  2. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Insurance

    Learn about the SPDR S&P Insurance exchange-traded fund, which follows the S&P Insurance Select Industry Index by investing in equities of U.S. insurers.
  3. Retirement

    Strategies for a Worry-Free Retirement

    Worried about retirement? Here are several strategies to greatly reduce the chance your nest egg will end up depleted.
  4. Markets

    The 5 Biggest Canadian Insurance Companies

    Learn more about the insurance industry as a whole, how it functions in Canada, and the five largest Canada-based insurance companies.
  5. Stock Analysis

    How MetLife Became a Global Insurance Giant

    MetLife is the largest life insurer in the United States. Here's how it has managed to stay on top.
  6. Professionals

    The Top Insurance Needs of Retirees

    While health insurance is the primary insurance need for retirees, there are other types advisors need to consider for their retired clients.
  7. Professionals

    Life Insurers and Millennials: Strange Bedfellows?

    Life insurers are courting Millennials. Is this a strange fit? And how will they cater to this generation?
  8. Investing

    Advising FAs: Explaining Life Insurance to a Client

    Life insurance was initially designed to protect the income of families, particularly young families in the wealth accumulation phase, in the event of the head of household's death.
  9. Professionals

    How Advisors Can Help Expectant Couples

    Bringing a child into the world makes parents more acutely aware of their finances. Here's how advisors can help expectant couples prepare.
  10. Insurance

    How Does Cash-Value Life Insurance Work?

    Cash-value life insurance pays a beneficiary upon the death of the policyholder, and accumulates a cash value during the policyholder’s lifetime.
RELATED TERMS
  1. Automatic Premium Loan

    An insurance policy provision that allows the insurer to deduct ...
  2. Cestui Que Vie

    The individual who is the beneficiary of a trust or insurance ...
  3. Classified Insurance

    Insurance coverage provided to a policyholder that is considered ...
  4. Guideline Premium And Corridor Test (GPT)

    A test used to determine whether an insurance product can be ...
  5. Cash Value Accumulation Test (CVAT)

    A test method used to determine whether a financial product can ...
  6. Noncancellable Insurance Policy

    A life or disability insurance policy that an insurance company ...

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!