This is a subject that most people would just prefer to ignore. After all, it requires you to face your own mortality and then make some hard decisions about how you want to provide for your family after your death. A recent study found that 39% of surviving families did not have any life insurance. Of those who had insurance, the average amount was just 2.1 times personal income. Thus, two-thirds of surviving spouses felt that there was a devastating or major impact on their family’s personal situation after their spouse’s death (Source: National Underwriter, July 5, 2004).
Many rules of thumb indicate how much life insurance you should purchase, such as five to seven times your annual income. While that might sound like a lot of insurance, it may actually understate your needs. In order to distribute the Victim’s Relief Fund to surviving families of those lost on September 11, the U.S. Department of Justice estimated the economic loss for individuals, based on various ages, incomes, and the number of dependent children. Their tables calculated settlements ranging from four times to as much as 50 times income. For instance, the loss for a married 40-year-old with two minor children (newborn and nine years old) earning $150,000 annually was calculated as $2,822,558 (Source: U.S. Department of Justice). From those figures, other income sources were deducted, such as government benefits, investments, etc.
Thus, when calculating your life insurance needs, don’t focus on rules of thumb. Rather, go through a detailed analysis of your insurance needs. In addition to the loss of your income, address issues such as: