Frequently Asked Question

December 03 2009  |  Filed Under » , , , ,

How much life insurance should I have?

The main purpose of life insurance is to provide the same standard of living for your family and cover your financial responsibilities in the event of your death.

The two most common methods for determining insurance needs are the following:

  1. Rule of Thumb Method - Most commonly used, and easy to calculate. Simply calculate your annual income and multiply this figure by five- to 10-times your annual income. It's a quick method, but not the most precise nor situation-specific.

  2. Actual Needs Method - Here you'll need to compute all of your debts, expenses and inflows in a similar budget and balance sheet format. Once you've done this, you'll want to make sure that you obtain enough insurance to payoff all of the debts (current and future-college for the kids), next you'll want to add a yearly expense cushion (maybe cover five- to 10-years of expenses). When you have these figures, add them together and this is how much insurance you should obtain.

  3. Standard of Living Method - Determine the amount of money the survivors would need to maintain their standard of living if the insured person died. Multiply that amount by 20. The thought process here is that the survivors can take a 5% withdrawal from the death benefit each year (which is equivalent to the standard of living amount) where at the same time the survivors should be able to invest the death benefit principal and earn 5% or better.

    Watch: Life Insurance
    (For more, see What To Expect When Applying For Life Insurance.)
(This question was answered by Steven Merkel.)

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by

Steven Merkel

Steven Merkel
Steven T. Merkel, CFP®, ChFC, is the Managing Director of wealth management operations for Piedmont Investment Advisors, LLC in Naples/Bonita Springs, Fla. Steve is a former U.S. Army air defense artillery officer and has been giving financial advice for more than 16 years. He is a Certified Financial Planner® practitioner and a Chartered Financial Consultant. Mr. Merkel has been featured and widely quoted in numerous publications including The New York Times, BusinessWeek, Entrepreneur, Consumer Reports, Investment News, Financial Planning Magazine and Fidelity's Stages Quarterly. He enjoys fishing, golf, military history, Miami Hurricane football and relaxing on the beaches of South Florida.
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