How Much Life Insurance to Buy

Health and life insurance agents sometimes recommend using a salary multiplier in order to determine your life insurance coverage needs. The recommended multiplier can vary widely, anywhere from five to twenty times your salary, and typically does not produce very accurate results. Read on to learn how to estimate your life insurance needs accurately.

Accounting for All Expenses

When you purchase health and life insurance, you should include at least enough coverage to replace the income you currently contribute to your family. Remember to include enough to pay for incidental expenses for services that you used to provide, such as tax preparation, cleaning, childcare, etc. If you would like to make a contribution to charity or leave your loved ones an inheritance, you will need to increase your coverage to allow for these goals. Also factor in the hidden income you earn for your family. Hidden income refers to money you receive from your employer aside from your wages, such as health insurance premiums, retirement contributions, etc. Lastly, include enough in your life insurance policy to pay for your final expenses, including funeral and burial costs, taxes, and so on. Budget at least $15,000 for these expenses.

Factor in Alternative Sources of Income

Most likely, your health and life insurance policy will not be your family's only source of income after your death. Typically, your family will also receive Social Security survivor benefits. Although survivor's benefits can be considerable, they are rarely enough to maintain the family's former lifestyle. For example, if you were earning a salary of $36,000 when you died, the maximum survivor's benefit if you had a spouse and two children under 18 would be $2,400 monthly. This still leaves your family thousands of dollars short of what they were living on before you died. Other sources of income for your family might include employer-sponsored life insurance or life insurance through a credit card.

Salary Multipliers

You have probably heard health and life insurance pundits advise basing your life insurance benefits on a certain multiple of your current salary. This method of estimating life insurance needs has several shortcomings, however. For one, the salary multiplier method fails to account for inflation. This method also usually assumes a certain interest rate return once the death benefit is invested, but investment returns are notoriously inconsistent. The salary multiplier approach also does not take alternative sources of income into consideration, such as the Social Security survivor's benefits mentioned previously. Finally, the salary multiplier method does not account for large expenses that your beneficiaries will incur, such as college tuition, retirement, or mortgage repayment.