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Life Insurance - How Much Do You Really Need?

Oct 29, 2007
Everyone needs life insurance, especially if you own a home or have a family. It's a way to ensure that those who depend on you financially will have what they need in the event of your death.

Most people understand the need for life insurance; they just don't know how much they need. The point of life insurance is to take care of your family after your death in the same manner you would if you were still alive. Most insurance experts recommend taking out a policy that is between 5 and 15 times greater than your annual gross income, or alternatively, an amount up to your annual salary times the number of years before your youngest child is out of college.

If that amount seems too high, consider how much your family would need to pay all of their expenses indefinitely if your salary were to suddenly stop.

Economic replacement is another way to calculate the amount of insurance you need. Instead of trying to "guesstimate" how much coverage you will need now and in the future (requiring you to change policies every few years), the "full economic replacement" concept encourages applicants to purchase the maximum coverage allowed by an insurance carrier. Although pricier than a need-based policy, it offers the most comprehensive protection for your family, no matter how your lifestyle changes in the future.

Term or Whole Life?
There are two basic types of life insurance available: term and whole life or permanent coverage. Term life insurance is the cheapest form of life insurance. But, it does have a downside. It is only in force for a specific time and once it expires, you lose the death benefit unless to take out a new policy, which tends to cost more as you age. Still, it remains a valuable asset for those who can't afford a more expensive whole life policy.

In contrast, permanent life insurance is just that - permanent, providing coverage for your entire life as long as your premiums are kept up to date.

Another benefit to this type of policy is the ability to accumulate tax-deferred savings that can be borrowed in the future for such things as college costs, to buy a home, or to provide retirement income. Unlike term policies, which cost more with each policy turnover, permanent whole life policies allow the buyer to "lock in" the premium amount for the life of the policy.

Which type of life insurance policy you ultimately decide to purchase depends a great deal on your age, income, lifestyle and family situation. The key to finding the right policy is to take a good look at both your current and future needs in order to best protect your family in the event of your untimely death.
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