How much life insurance is enough?

By Chizoba Morah AAA
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 common fringe benefits?

    Learn how offering fringe benefits can be a strategic recruitment and retention tool for employers and drastically increase ...
  2. What's the average salary of an actuary?

    Get insight into the intriguing career of risk analysis and forecasting. How much do actuaries make, and how is this field ...
  3. 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 ...
  4. 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 ...
RELATED TERMS
  1. Guideline Premium And Corridor Test (GPT)

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

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

    A life or disability insurance policy that an insurance company ...
  4. Policy Or Sales Illustration

    An educational tool that shows a prospective or new insurance ...
  5. Paid-Up Additional Insurance

    Additional whole life insurance that a policyholder purchases ...
  6. Re-Entry Term Insurance

    A type of term life insurance contract that offers low rates ...

You May Also Like

Related Articles
  1. Insurance

    Should You Borrow From Your Life Insurance?

  2. Insurance

    Life Insurance: How Long Does It Take ...

  3. Trading Strategies

    How Good An Investment Is Life Insurance?

  4. Retirement

    The Smart Way To Use Life Insurance ...

  5. Insurance

    Is Burial Insurance A Ripoff?

Trading Center