How Much Life Insurance Is Enough?

Life insurance ensures your family is financially protected if something happens to you. If your loved ones depend on your income, they could be seriously stressed if that cash flow is suddenly cut off.

Unfortunately, too many consumers mistakenly believe they have enough life insurance to protect their loved ones when they are severely underinsured adequately.

Just look at the numbers: Americans have a combined $10 trillion worth of life insurance coverage, according to a 2008 American Council of Life Insurers study. That may seem like an incredible amount of insurance, but it’s still insufficient. $10 trillion represents only 72% of our nation’s combined annual income, totaling $14 trillion.

In other words, thousands of Americans don’t have enough insurance to cover even one year’s salary. These people may have some life insurance, but it’s not enough to ensure their family can maintain their current standard of living.

Delving more profound than the lump sum

Looking at your coverage as a lump sum may seem like a lot of money; therefore, you may assume there will be plenty to protect your family in your death. However, it’s essential to consider that lump sum of your annual income.

When determining whether or not you have enough insurance, you may ask yourself a few critical questions: How much do I earn each year? How many years would I want my family to be covered if something happened to me? How much is going to be enough to cover all of their expenses? What standard of living do I want them to have?

The answers to these questions may lead you to realize that you don’t have enough life insurance.

Calculating the right amount

There are a few different ways to calculate the amount of life insurance you need to protect your family adequately. 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 professionals say this “income multiplication” method is inaccurate. Because each family faces a unique set of circumstances and needs, you may want to consider some factors other than just annual income. Figuring out the right amount of life insurance requires a comprehensive evaluation of your financial goals, debts, investments, and the quality of life you want your family to have.

Here are a few things to take into consideration:

• Monthly expenses: Tally up all your family’s monthly fees, including your mortgage payment, car payments, utilities, groceries, food, clothing, and other costs. The death benefit on your life insurance policy should be able to cover these expenses for at least a few years, ensuring that your family will not have a decreased standard of living if you die.
• Surviving parent’s income: If something were to happen to you, would your spouse need to work to support your children? This may be a problem if you have young children or a disabled child who needs extra attention. If taking a job could interfere with your spouse’s ability to care for your children, you’ll probably need more life insurance. This will ensure that the surviving parent doesn’t have to work—or at least not until your children are older.
• College tuition: Do you want to fund your children’s college education? If so, you should also factor this into your life insurance calculation. It would probably be difficult for the surviving parent to pay college tuition on a single income.
• Factoring in inflation: Don’t forget to consider the cost of inflation. You can expect the cost of living to increase by about 4% to 5% each year. If you purchased a life insurance policy many years ago, the death benefit might not be enough to pay for today’s cost of living—let alone tomorrow’s.

Figuring out how much life insurance you need to protect your family is a complex process that involves considerable research and thought. If you’re struggling to figure out how much life insurance is enough, you may want to meet with an expert, and Brian Gruss can help you determine how much insurance you need and what you can realistically afford.