Most people in the United States who have loved ones have some life insurance either personally owned or part of a group insurance program at work. The problem is that most people probably don't have enough.
One should take some time to answer the question "How much life insurance should I have?"
The simple answer is enough life insurance so that one's loved ones can maintain their lifestyle. Look at this as a financial transaction, here are a few formulas and methods you might use:
The "Interest Method" - (This is a rough calculation. It doesn't take into consideration inflation among other things)
1. How much income on an annual basis would your family need to pay bills and continue in their lives?
2. What interest rate could your survivors earn with very little risk?
3. Divide the annual income needed by the interest rate.
For example: You calculate your family's income need at $100,000. You use an interest rate of 5%
$100,000 divided by 5% (100,000/.05) = $2,000,000
4. Deduct iquid investments owned by you (bank savings, stock, bonds) and you have an idea of how much insurance you should have.
The above is a variation of the "human life value" method which is similar to what an expert witness would recommend should be given in an insurance settlement in a wrongful death judgment such as a freeway accident where the other driver is at fault.
The Multiple of Earnings Method
This is the fastest method. One simply takes their income and multiplies it by some factor. from 6x to 20x. The above example would be the high end of 20x (assuming $100,000 was the insured's income). Experts often state that the multiple should be higher for a younger insured and a lower multiple as one gets older.
Detailed Calculation
One can also work with a professional insurance planner on several different software platforms to do this calculation.
One can read more about "How much life insurance should I have?" on the LIfeInsure.com website.
Daniel Luke
Invite as author
Informative article!