The down and dirty answer to this question is almost always….MORE. I’ve never met a widow or widower that said that their spouse had wasted money on life insurance. I HAVE dealt with survivors scrambling to put enough money together just to get the deceased into the ground!
With the obvious out of the way, let’s look at a simple way to come up with some realistic amounts of coverage to purchase. Years ago, I was in a class in Hartford, Connecticut put on by one of those famous insurance carriers and they brought in an expert. Basically, their presentation boiled down to this. The survivors need 75% of the income after the wage earner’s death to maintain their same standard of living.
To make it easy, assume John and Jane both make $50,000 for a total family income of $100,000. After either of their deaths, the survivor would need to make $75,000. Since they already make $50,000, they need to have a means to bring in an additional $25,000.
The question we need to ask is “how big of a pile of money would be required to create $25,000 of income?” If you assume the pile would earn 4% per year, you would need to have $625,000 in savings. (You solve for this number by dividing 25,000 by .04) So if you have $625,000 of savings in the bank, you don’t need life insurance. That is possibly true but…
Let’s assume that you have only $150,000 of savings, and each of you have another$50,000 of employer provided life insurance. In this scenario, you would deduct the $200,000 in savings and employer life insurance and arrive at a need of $425,000.
Is this the best way to arrive at an amount of life insurance to buy? Possibly not, but it will get you in the ballpark. It helps you to redirect your thinking from an amount of coverage to an amount of income. That’s what your loved ones need…
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