It's easy to purchase too little, or even too much, life insurance. This guide will help ensure you're prepared to make the prudent choice when purchasing this critical product.
A question I’m often asked is, how much life insurance do I need? The answer begins with the question, what is the purpose of life insurance? The purpose of life insurance is to replace the financial loss to the survivors that results from the death of the insured. In other words, we need to replace the income of the deceased, and pay off the debts incurred by the deceased.
Let’s start by calculating how to replace the income of the deceased. The amount is calculated by using a multiple of income. The greater the income, the greater the amount of insurance, and the younger the insured, the greater the amount of insurance. This is because a younger person has more earning years ahead than an older person. For example, one insurance company calculates those multiples and ages as follows:
The age ranges and multiples of income can vary from one insurance company to another, but this gives you a general idea. The goal is to make sure you are properly insured, and not under insured or over insured. Most people are under insured.
For example, a 42-year-old specialist earning $400,000 per year needs $9,200,000 in life insurance to be properly insured. It sounds like a lot, but it isn’t when you consider you are replacing 23 years of income at $400,000 per year (23 x $400,000 = $9,200,000).
Remember, this is insurance. Ask yourself, why do you have it? The answer is, the same reason you have any other type of insurance… in case the unexpected happens. Just like any other insurance, you need enough insurance to protect yourself and your family. Let the numbers I’ve just given you be your guide and get the right amount of life insurance to protect your loved ones.
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