How to use this tool
How to use this tool
Buying Life Insurance: How Much is Too Much?
by Scott Bombeck (Write for us!)
(Click on the links within the article to get definition of that word)
(Click on the links within the article to get definition of that word)
Making decisions regarding life insurance may seem simple enough if you believe what you see and hear in television and radio advertisements. However
there are many things to consider and wading through the sales pitches to find truly helpful information can be a bit more challenging. So how do you decide how much coverage is appropriate?
Many insurance agents and other "pundits" use a multiple of salary approach to finding an answer to this question. They will tell the unsuspecting would-be insured that they need 7, 10 or even 20 times their income in coverage. While this can be a useful rule of thumb to begin the discussion, this guesstimate is inadequate.
The proceeds from life insurance are intended to provide relief for the survivors in three key areas; paying off debts and final costs, replacing lost income, and setting money aside for those things you were saving for, like education.
The multiple of salary approach is too simplistic and fails to take into consideration other sources that can offset some of the need, such as savings, investments and an increase in earnings as the survivors alter their employment in response to the loss.
A proper survivorship analysis will take all of these things into consideration as well as future earnings on investments, increases in pay, children growing up and leaving home and inflationary effects. It is important to have a survivorship analysis done when first making the coverage decision and again each time your circumstances change or at least at annual reviews.
Many insurance agents and other "pundits" use a multiple of salary approach to finding an answer to this question. They will tell the unsuspecting would-be insured that they need 7, 10 or even 20 times their income in coverage. While this can be a useful rule of thumb to begin the discussion, this guesstimate is inadequate.
The proceeds from life insurance are intended to provide relief for the survivors in three key areas; paying off debts and final costs, replacing lost income, and setting money aside for those things you were saving for, like education.
The multiple of salary approach is too simplistic and fails to take into consideration other sources that can offset some of the need, such as savings, investments and an increase in earnings as the survivors alter their employment in response to the loss.
A proper survivorship analysis will take all of these things into consideration as well as future earnings on investments, increases in pay, children growing up and leaving home and inflationary effects. It is important to have a survivorship analysis done when first making the coverage decision and again each time your circumstances change or at least at annual reviews.
Email this Article
Print this Article
Cite this Article
Other Suggested Articles
Life Insurance 101 >
How Much Insurance Do You Need? >
Determining the Right Amount of Insurance for You >
Life Insurance Don'ts >
Life Insurance: Types of Policies and Provisions >
Coming to Grips with Life Insurance >
Borrowing Against a Life Insurance Policy >
The Basics of Life Insurance >
How Much Life Insurance Do I Really Need? >
Common Insurance Mistakes We All Make >
Article reprinted with permission. Unauthorized reproduction of this content is prohibited.
Click here to license InvestorGuide University content.
Click here to license InvestorGuide University content.
