The amount of life insurance a person should own is a very subjective question.
It can involve emotion and comfort level and placing a value on peace of mind.
But there are several agreed upon ways to approach the answer to the question of how much term life insurance should a person purchase.
The first approach is to determine what is the income value of the life being insured.
We are generally speaking of the family breadwinner when considering this aspect of the proper amount of insurance.
For this we need to estimate the total income the breadwinner would make over a lifetime.
We would factor in pay raises or other increase in income and also factor in inflation which would be a lessening in value of the money coming in.
This formula usually results in the highest amount of insurance required.
Another approach is to calculate replacing the income of the insured individual.
This means what amount of money placed into a savings account or CD at current rates would it take to equal the income of the breadwinner today.
For example, if the breadwinner makes $100,000 a year, how much money would it take at a certificate of deposit rate of 3% to yield $100,000 a year? The answer is $3,333,333.
And that is how much term life insurance you would purchase.
The third way to view what amount of term life insurance is needed is from the viewpoint of debt retirement.
Here the objective is to give the spouse, or beneficiary, a financial head-start by paying off all debts, including the mortgage.
In addition, we usually include a sum of money to get the spouse through the first year or two in case they need to do job training and sometimes we also include some college funding for the kids.
It can involve emotion and comfort level and placing a value on peace of mind.
But there are several agreed upon ways to approach the answer to the question of how much term life insurance should a person purchase.
The first approach is to determine what is the income value of the life being insured.
We are generally speaking of the family breadwinner when considering this aspect of the proper amount of insurance.
For this we need to estimate the total income the breadwinner would make over a lifetime.
We would factor in pay raises or other increase in income and also factor in inflation which would be a lessening in value of the money coming in.
This formula usually results in the highest amount of insurance required.
Another approach is to calculate replacing the income of the insured individual.
This means what amount of money placed into a savings account or CD at current rates would it take to equal the income of the breadwinner today.
For example, if the breadwinner makes $100,000 a year, how much money would it take at a certificate of deposit rate of 3% to yield $100,000 a year? The answer is $3,333,333.
And that is how much term life insurance you would purchase.
The third way to view what amount of term life insurance is needed is from the viewpoint of debt retirement.
Here the objective is to give the spouse, or beneficiary, a financial head-start by paying off all debts, including the mortgage.
In addition, we usually include a sum of money to get the spouse through the first year or two in case they need to do job training and sometimes we also include some college funding for the kids.
