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What determines your life insurance
need?
Your life insurance needs change as your life changes. When
you are young, you may not have a need for much life
insurance. However, as you take on more responsibility and
your family grows, your life insurance needs increase. You
should periodically review your needs in order to ensure
that your life insurance coverage adequately reflects your
life situation.
Estimating your life insurance need
There are several simple methods
you can use to estimate your life insurance need. These
calculations are sometimes referred to as "rules of
thumb" and can be used as a basis for your discussions
with your insurance agent.
Income rule:
The most basic rule of thumb is
the income rule, which states that your insurance need would
be equal to 6 or 8 times your gross annual income. For
example, a person earning a gross annual income of $60,000
should have between $360,000 (6 x $60,000) and $480,000 (8 x
$60,000) in life insurance coverage.
Income plus expenses:
This rule considers your insurance
need to be equal to 5 times your gross annual income plus
the total of any mortgage, personal debt, final expenses,
and special funding needs (i.e., college). For example,
assume that you earn a gross annual income of $60,000 and
have expenses that total $160,000. Your insurance need would
be equal to $460,000 ($60,000 x 5 + $160,000).
Premiums as percentage of income:
Under this rule of thumb, a
minimum of six percent of your gross income (as the primary
income earner) should be spent on life insurance premiums.
Add an additional one percent for each dependent. Once you
determine the percentage of your income which should be
spent on life insurance premiums, you should purchase as
much life insurance as you can get for that premium amount.
There are several more comprehensive
methods used to calculate life insurance need. Overall,
these methods are more detailed than the rules of thumb and
provide a more complete view of your insurance needs.
Family needs approach:
The family needs approach requires
you to purchase enough life insurance to allow your family
to meet its various expenses in the event of your death.
Under the family-needs approach, you divide your family's
needs into two main categories:
- immediate needs at death (cash needs),
and
- ongoing need (net income needs).
Once you determine the total amount of
your family's needs, you purchase enough life insurance to
cover that amount.
Income replacement:
The income replacement calculation is based on the theory
that the purpose of life insurance is to replace the loss of
your income when you die. Under this approach, the amount of
life insurance you should purchase is based on the value of
the income that you can expect to earn during your lifetime,
taking into account such factors as inflation and
anticipated salary increases.
Estate preservation and liquidity
needs:
The estate preservation and
liquidity needs approach attempts to calculate the amount of
life insurance needed upon your death for items such as
taxes, expenses, fees, and debts, while preserving the value
of your estate. This method takes into consideration the
amount of life insurance needed to maintain the current
value of your estate for your family, while providing the
cash needed to cover death expenses and taxes.
Learn More...
Life
Insurance Overview | Understanding
The Basics | Term
& Cash Value
Coverage Amounts | Reading
Policies | Planning
Concerns | Life
Calculator | Life Glossary
Please Note: The
information contained in this Web site is provided solely as a source of
general information and resource. It is a not a statement of
contract and coverage may not apply in all areas or circumstances. For a complete
description of coverages, always read the insurance policy, including
all endorsements.
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