The Magic Number: Do You Have Enough Life Insurance?

If you’ve purchased life insurance to help protect your family in the event of your death, good for you. However, you probably shouldn’t pat yourself on the back just yet. Why not? Because unless you have the appropriate life insurance, your family isn’t fully covered. Do you have enough life insurance after reviewing your current financial status?

According to a 2008 study by LIMRA International, a whopping one-third of U.S. adults do not have life insurance. This is undoubtedly a troubling statistic, but another trend is perhaps even more disturbing. Countless families who do have life insurance do not have enough.

Americans have a combined $10 trillion worth of life insurance coverage, according to a 2008 study by the American Council of Life Insurers. While this may seem like an astounding amount of insurance, $10 trillion represents only 72% of our nation’s combined annual income, a whopping $14 trillion. While uninsured families know they have no coverage, most underinsured families don’t realize it until it’s too late.

Even with life insurance, your family could be at severe financial risk if you don’t have the proper amount. If you’re unsure whether you have enough coverage, it’s time to take a second look at your insurance policy.

Pin-pointing the magic number

Figuring out how much life insurance you need is no easy task, and there are a few different ways to calculate the appropriate amount of life insurance you need. Some insurance experts say you should multiply your annual income by three times, while others say you need at least eight times your annual salary.

However, many advisors point out that the income multiplication rule of thumb may not be the best calculation. When it comes down to it, the amount of life insurance you need depends on your family’s unique situation, including many different factors.

To figure out the right amount, you may want to ask yourself a few critical questions, including:

  • If I were to die, how much money would my spouse need to continue paying our mortgage?
  • Would my spouse be able to work, or would they need to stay home with the children?
  • Would my spouse need to pay childcare expenses if they were to work?
  • How will my children be able to afford college tuition?
  • Will my spouse be able to make contributions to a retirement account, ensuring a comfortable retirement?
  • How will inflation impact my family’s finances in future years?

Once you answer all these questions, you can make a more informed decision about the life insurance you need. Of course, you’ll also want to review your coverage each year. Suppose there have been changes in your family (your children are now grown and no longer need financial support) or your overall financial situation (you now have a higher-paying job or a lower mortgage). In that case, you’ll want to adjust your life insurance coverage accordingly.

Purchase the right policy.

There are two basic life insurance policies: term insurance and cash-value insurance. Term life covers you for a specified time, anywhere from one to 30 years. These policies are less expensive because they are designed solely for protection. Many people choose term insurance because their need for life insurance will decrease as they get older. Term insurance is also a good option for families who want to protect their children until a certain age.

Cash-value life insurance covers you for your entire life. These policies act as both an insurance plan and a savings mechanism. Because the insurance company invests some of your premium. Permanent life has the potential to accumulate cash value on a tax-deferred basis.

Eventually, you can borrow money from a cash-value life policy. Because loans are usually not considered income, you probably will not face any income tax liability for these withdrawals. However, whatever you withdraw will be subtracted from the ultimate death benefit.

Calculating how much and what type of life insurance you need is a complex process involving much research and thought. You may want to meet with Brian Gruss, an insurance expert, who can help determine how much insurance you need and what you can realistically afford.