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. Insurance

    4 Things That Keep You From Getting Life Insurance

    We look at four common reasons people give for not applying for life insurance, and see if they're legitimate.
  2. 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.
  3. 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.
  4. Insurance

    How to Make Sure You're Not Over-Insured

    There is a cost—and not just in dollars—to being over-insured.
  5. Insurance

    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.
  6. Insurance

    The Best Type Of Life Insurance For You Right Now

    Different stages of life call for different amounts of life insurance coverage. Find out what you need, when and why.
  7. Personal Finance

    The Best Life Insurance for Military Families

    Two of the most common types of life insurance are term and whole life. Here's why the latter isn't a good idea for most military families.
  8. Financial Advisor

    Why the Wealthy Should Buy Lots of Life Insurance

    Wealthy clients have an enviable problem — managing, preserving and growing wealth. Properly structured life insurance can help with these goals.
  9. Personal Finance

    Military Families and Life Insurance: What to Know

    Here's an overview of what life insurance should address, with five considerations that should help determine how much coverage you should have.
RELATED TERMS
  1. Whole Life Insurance Policy

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

    A type of employer-sponsored protection against the loss of income ...
  3. Personal Lines Insurance

    Property and casualty insurance products for individuals that ...
  4. Decreasing Term Insurance

    A type of annual renewable term life insurance that provides ...
  5. Adjustable Life Insurance

    A type of life insurance that combines features of term and whole ...
  6. Voluntary Life Insurance

    A financial protection plan that provides a beneficiary with ...
Hot Definitions
  1. Price Elasticity Of Demand

    A measure of the relationship between a change in the quantity demanded of a particular good and a change in its price. Price ...
  2. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
  3. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Down Round

    A round of financing where investors purchase stock from a company at a lower valuation than the valuation placed upon the ...
  6. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
Trading Center