How much life insurance do I need?
By Jeff Wuorio • Bankrate.com

Dear Money Matters,
I would like to know how much life insurance I need to maintain my lifestyle if my husband dies. My husband makes about $50,000 a year. I only make $13,000.
Debbie

Dear Debbie,
We're all bombarded by ads these days touting the extraordinary amounts of life insurance coverage you can obtain. Huge policies may be out there, but avoid buying more insurance than your situation mandates. If -- as we all hope -- you never have to use your life insurance coverage, you end up spending unnecessary money on premiums.

Rather than just trying to get the most insurance you can, use a simple formula to get a reasonably accurate feel for how much coverage you actually need. Start with the living expenses for the number of years that the insurance will have to cover. If, by chance, you have a child you expect to send to college, add on those expenses. It's also a good idea to tack an emergency sum of money to address unforeseen expenses. Finally, take your husband's yearly income, add it to interest from any investments you may have and subtract that from your tally of expenses. That, in the end, should supply you with a fairly focused estimate of how much coverage you may need.

Here's how one scenario plays out. Say you need $75,000 a year to cover your expenses, and you want the insurance coverage to last 10 years. That means $750,000. There are no college-bound kids around, so you can bypass that added expense. Toss in $50,000 for emergencies. Finally, let's say you get $25,000 a year in income from investments; subtract that and your husband's salary from the $800,000, and you get a final figure of $725,000.

Of course, there are additional wrinkles that can figure into the formula. Social Security? Whether you want to count on that as an added source of income or not is your call. Likewise, if you have other forms of coverage, such as mortgage insurance, be sure to subtract those from the overall coverage amount you calculate. If you don't, you're effectively paying for duplicate coverage. Also, it's up to you to determine whether you would continue to work if your husband died. If the answer is yes, that's about $13,000 less in insurance coverage that you'll need per year.

One last tip -- as a general rule, it's a good idea to stick with term life insurance. It's the most simple you can obtain -- you pay the premium and the coverage is in force. There are other insurance products to be had, including various types of cash-value insurance coverage, but those are more expensive, particularly in the early years of coverage when much of what you're paying covers sales commission rather than going toward building up the policy's cash value.

-- Posted: May 20, 2004