You may hear different things about the amount of life insurance that you need. An easy way some suggest is to take your annual income and multiply it by 10.
But that doesn’t take everything into account, such as debts, specific things you want the money to do, or a safe withdrawal rate to give your beneficiaries an income that you want them to have if something happens to you. The right number could be more like 20 times your annual income, but it all depends on the purpose of the money and your financial situation.
The amount of life insurance necessary to do what you want it to do is usually a little more than people think. With term insurance, in particular, the price per thousand dollars’ worth of coverage is low enough, generally, that it is affordable to get large amounts of coverage.
It depends on the purpose of the insurance. It could be that it is meant to pay off a certain amount of debt, and could even be required by a lender. It could be that it’s intention is to allow a business partner to buy out the business interest of a surviving spouse. It could be that the money is meant to provide for a family after a breadwinner is gone.
Keep in mind that in most cases the death benefit will be completely tax free.
Even with that bonus, it may take $1,000,000 or more to give the surviving family members even a shadow of the lifestyle they were accustomed to before the death of the breadwinner, if the money is meant to last a very long time.
Many people just say, “I guess my spouse will have to remarry or work, because I’m not paying for them to live off a trust fund the rest of their lives.”
It all depends on the person.
Speaking of spouses, even non-working stay-at-home spouses have an economic value to a household, and it may make sense to get $250,000 or more of life insurance on their lives in order to pay for the kind of work that the spouse currently does for free, such as taking care of the house and shuttling kids to soccer practice.
Estate planning may call for a large life insurance policy to be held in an irrevocable trust, and to essentially pay for the estate taxes upon the death of insured person.
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