A Rule of Thumb for Buying Life Insurance

Households need life insurance if they don’t have sufficient savings to replace the income of a deceased breadwinner. That means most households are good candidates for coverage. But how much should you buy?

The rule of thumb used by insurers and financial advisers is 8-10 times the breadwinner’s annual income. So, a household with one member earning $100,000 a year would need between $800,000 and $1 million in life insurance.

There are exceptions to this rule. Take, for example, a household with one member earning $1 million a year. This member’s beneficiaries wouldn’t necessarily need $8 million to $10 million in life insurance, as they’re more likely to have greater financial resources to fall back on.

The problem is that it’s not the wealthier households that lack life insurance; it’s the middle classes.

According to Conning Inc., Americans have a “life-insurance protection gap” of $15.8 trillion; households with annual incomes of $38,520 to $101,582 can claim a disproportionate share of that gap.

Why the gap? Some people simply don’t think they’ll need life insurance at all. Others overestimate the coverage they have through their employers. And still others consider life insurance too expensive.

Consult with your financial advisor on whether you are currently covered, and if you have sufficient coverage. He or she can explain your options. If you’re concerned about budget, the least expensive coverage is basic term life insurance, which provides a designated amount of money if a death occurs within a specified time period.

If you’re willing to spend more, you might want to consider a permanent life policy, which combines a death benefit with a tax-sheltered savings. Then there are so-called variable life policies that can include stock market investments.

Because it’s so important for your family to live in comfort after the death of a loved one, you need expert guidance in considering your options. Call now.