Experts: How Much Life Insurance You Truly Need Most Need Up To 15 Times Their Annual Salary
Whether you’re getting married, having kids or just planning for the future, there is one thing that you cannot ignore: life insurance. Insurance is a safety net, guaranteeing that your family can continue their lifestyle after you’ve passed.
According to a recent study for life insurance company JD Power and Associates, life insurance has steadily declined over the past 20 years. The study states that 40 percent of adult Americans have no life insurance at all. As a result, less than 25 percent of widows and widowers of spouses who died prematurely (those aged 30 to 55) felt their spouse had adequate life insurance, according to a recent article in Forbes Magazine.
HOW MUCH YOU SHOULD SPEND
Money experts say the best way to protect your family is by investing in a life insurance plan that covers 10 to 15 times your annual salary. More precisely, those experts say you should calculate how much how much money your family will need to continue their lifestyle; how much you’re the loss will impact big expenses, like your children’s college tuition; and how long it will take surviving family members to rebound from the change.
You will also want to factor how much your death will cost your family – funeral expenses, outstanding debts, etc.
“If you’re a stay-at-home parent, how much would the family need to spend to replace your services? Some might need a nanny for several years at a cost of $20,000 to $40,000 per year, which could result in a life insurance need of $250,000 or more,” says Sheryl Garrett in a March 2013 article in the New York Daily News. Garrett is a certified financial planner and founder of The Garrett Planning Network, a nationwide network of fee-only financial advisors who work on an hourly basis.
“Determine how much income the survivors are likely to need, then do the same calculation for children or others needing support for a more limited period of time,” Garrett continues. “Next, adjust for the assets and income coming in, which results in the remaining life insurance needed.”
OTHER ASSETS CAN REDUCE YOUR INSURANCE NEEDS
You may want to reduce your life insurance needs by assets your family will inherit from you, including life insurance policies you may have through work, says Liz Davidson in a March 2013 article in Forbes Magazine.
She says retirement accounts like 401(ks) and IRA are no longer subject to a 10 percent penalty after you die.
“You can also reduce your family’s income needs by whatever survivor benefits they collect from Social Security and other income like a rental property,” she said.
Many people use life insurance calculators to determine the best plan for their families – and that’s a great starting point. However, it’s best to work with a financial consultant to be sure you are maximizing your long-term plans to help your family. The last thing you want to do is leave them with a mound of debt and no financial future.
“But remember, how much coverage you purchase is only part of the equation,” Davidson said. “Your premiums will also depend on your health status (one reason to get the insurance now before that possibly changes for the worse) so don’t eat too much of that Easter candy!”
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