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. Can you do a life insurance to life insurance 1035 exchange after the new life insurance ...

  2. 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 >>
  3. 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 >>
  4. Who are the best-rated life insurance companies in the US?

    Learn about what makes an insurance company the best. Read about the best life insurance companies in the U.S. in 2014, following ... Read Answer >>
  5. What is the average return on total revenue for the insurance sector?

    Learn about the three main segments of the insurance industry, and find out what the average return on revenues is for the ... Read Answer >>
  6. What is the difference between term and universal life insurance?

    Term life insurance is the most basic of insurance policies. It is nothing more than an insurance policy that provides protection ... Read Answer >>
Related Articles
  1. Personal Finance

    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.
  2. Financial Advisor

    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.
  3. Personal Finance

    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 ...
  4. Personal Finance

    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.
  5. Personal Finance

    How Much Life Insurance Should You Carry?

    Learn how much - if any - insurance you really need.
  6. Personal Finance

    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.
  7. Investing

    3 Reasons to Avoid Term Insurance

    Find out the reasons why term life insurance may not be for everybody, and why you may want to avoid it in favor of a permanent life insurance policy.
  8. Personal Finance

    Getting Your (Insurance) House in Order

    From starting a family to retirement, insurance can play a role in taking care of financial needs. This piece looks at some of the choices you can make.
  9. Financial Advisor

    Whole or Term Life Insurance: Which Is Better?

    Learn the difference between term life insurance and whole life insurance. Understand when it is beneficial to buy each type of life insurance.
  10. Personal Finance

    Bundle Your Insurance For Big Savings

    Bundling your insurance can save you money and time. Read on to see how get the most out of multiline insurance discounts.
RELATED TERMS
  1. Whole Life Insurance Policy

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

    A life insurance policy that a company purchases on a key executive's ...
  3. Universal Life Insurance

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

    A sector-following fund that invests primarily in insurance companies, ...
  5. Annual Renewable Term (ART) Insurance

    A form of term life insurance that offers a guarantee of future ...
  6. Wholesale Life Insurance

    A type of employer-sponsored protection against the loss of income ...
Trading Center