How much life insurance to buy?

A lot of insured’s get stumped when it comes to question How much life insurance is best for me?

My first answer is the best amount of life insurance is the amount that is force when you die. Meaning any amount is better than nothing, so don’t let this question stop you in your pursuit of getting life insurance.

There are four strategies I use to get at the policy limits of life insurance.

1) Needs Analysis:

This strategy sums your…

  • Burial expense
  • Payoff for all debts (mortgage, car loan, etc.)
  • Education fund for children
  • Replacement of income for a chosen amount of years.

This total is then subtracted by your current life coverage leaving your need for additional life insurance.

Or follow this link for an online life calculator

The disadvantage to the needs analysis / life calculator is your input for any given category can change. For example as you save for a child’s education that need can shrink, or debts can change when you buy a house. Despite these disadvantages, it gets your mind wrapped around what a life settlement is used for.

2) Multiple of income:

The multiple of income is my favorite strategy, as it keeps things simple with a clear goal. This strategy looks at data from a 1000 widows interviewed 5 years after losing their spouse. The ones that received 5-8 times their spouses income in life insurance proceeds reported that they were able to adjust and stay out of financial ruin. If you look at this in simple terms, if you knew your spouse wouldn’t generate an income 5 years from now, you would save more, and make plans for the future as needed. However, this strategy works best when the other spouse has job skills that they can rely on to help adjust.

Addtionally, because its based off income it stays in line with debt because debt is issued based on your income, and inline with budget to pay for the insurance because it balances the cost and coverage.

3) Replace income:

In an ideal world everyone would by a life policy large enough that if the full death benefit was put into a savings account the interest would replace the income. The downside to this strategy is interest rates at the time of death are unknown, and the large face amount can cause a prohibitive premium.

4) Clean slate:

At a minimum buying a life insurance policy to cover outstanding debts and leaving spouse or family without the burden of debt. This stagey works well for single people that have no dependents or as starting point for life insurance, however if you plan to get married and start a family its best to project these changes in your life as life insurance policies are issued in typically 10 or more years of coverage.

There a a few exceptions to the guides above, although rare…

  • You have a dependent child or parent, that can not support themselves and will depend on your income throughout their life.
  • You have saved for retirement and are at a point where your earning years are few and there is no need to replace your income.

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f: (512) 535-0495

12600 Hill Country Blvd. Suite R-275
Austin, TX 78738