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How much life insurance do I
need?
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: July 2, 2002
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