The question leads into two concepts to consider before you answer it.
- Your immediate obligations at death - This is the sum of everything you owe including medical costs, outstanding debts, your mortgage, etc.
- Future income to sustain your household - This may be a little tougher to calculate. As a matter of fact, there actually are calculators that will produce this result with your input of several factors including:
- Final expenses as discussed above. A rule of thumb used is 4% of your estate or $15,000, whichever is greater
- College funding including tuition, room and board, books, etc., less any funds currently available.
- Savings and investments you currently have
- Mortgage payment fund
- Annual income needs before taxes to maintain the current standard of living—typically, 60%-75% of your total income.
- Life insurance
- Retirement savings
- Spouses income
- Estimated inflation rate
- After-tax net investment yield
- You spouses marginal tax rate
After this information is input into the calculator, youll get an idea of how much life insurance you need to have.
Capital Needs Analysis
This is another way of saying the same thing. The formula is: current and future financial obligations minus all existing resources equal life insurance needs.
It sounds like it could get complicated and it can. A simple way to think of it might be this:
- Lets say you think your family could make it on 40k per year which is 60% of the 66k you currently earn. You have no savings but your wife makes 20k per year. You know you can generate a 5% return on $400,000 that will make up the $20,000 shortfall. So, you might purchase $400,000 worth of term insurance.
Peace of Mind
You can use all the calculators you can find on the internet. You can also consult with one or more of the many life insurance and financial experts in this field. But the decision on how much life insurance you need comes down to peace of mind.
How do feel about protecting your family in case of a grave loss? How will lack of adequate funds and the loss of an earner impact their life? How much money will it take for you to be right with that?
Calculators and financial advisors can only provide some guidance. You have to make the final decision.