What is the right amount of life insurance?

| February 3, 2014

People rely on rules of thumb and one-size-fits-all formulas to determine how much life insurance is appropriate. A frequently cited shortcut suggests purchasing coverage equal to 5 to 7 times one’s income. Though this may be a better approach than not purchasing life insurance at all, it fails to take into account the unique circumstances and needs of every family.

A better approach is to conduct a thorough “survivor needs analysis” in order to determine exactly what debts survivors would need to pay off and exactly what assets or income they would require to meet their needs in the event of a family member’s death. The objective of such an analysis is to identify all significant needs and assign a dollar value to each. At that point, a comprehensive “risk management” plan that delivers the right amount of dollars at the right times to the survivors can be prepared.

If you haven’t ever done this analysis, or haven’t done it in a while, it’s an important task to cross off your financial to-do list. Keep in mind that people’s insurance needs typically change as they move through different life stages.

This article was reprinted from a First Command Financial Services publication.



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