How Much Life Insurance Do You Really Need?

How much life insurance do you really need?

As usual there is no definitive answer. It varies for everyone, and it depends on your unique situation. Right up front I want to give my opinion on life insurance. First, it’s very important. You also want to make sure you are buying the right amount for the right reasons.

What are the right reasons?

You should buy life insurance if you have income that will be critical to replace. As an example, the husband is the sole bread-winner with a hard-working stay at home mom and children. If anything happened to the husband the mom and children would be in a pickle.

Next you should buy life insurance to replace assets lost from estate taxes, or to give a substantial sum to a charity you like.

There are lots of other not so good reasons, including funeral costs, paying down debt. If you have a minimal amount of assets you should be able to pay for a $7,000-10,000 funeral. I don’t like insurance for retirement savings.

Now that’s out of the way, here are a few guidelines

1. Consider your income. Many people buy life insurance based on their income. You also need to factor in inflation. Factor in college tuition, or home purchase or whatever is important to you and your beneficiaries. This is where a good wealth advisor can really come in handy. He can help you determine these numbers in a financial plan.

2. Consider your expenses. Look at your budget. Uh oh, the “b” word again. Yep, need to consider your outgo and whether that will change once you are not on the planet. What will your spouse continue to spend and will you want debts paid off?

3. Avoid formulas and calculators. These tools can be helpful to give you a ballpark figure. Using rules of thumb like 8 times your salary isn’t applicable if you have a significant amount of money saved in a 401(k) for example. That doesn’t take into consideration the number of dependents you have either.

4. Review your debts. Think about how much debt you have. Mortgage, credit cards, home equity and student loan debt should all be considered. Do you want to leave these burdens to your spouse or other loved ones?

There are many factors to consider when trying to decide how much life insurance to buy. Have you reviewed your life insurance needs and beneficiary designations lately? If not, write me at david@lexwealth.com, or give me a call at (859) 225-2596.