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How Much Life Insurance Do I Need?
If you have dependents, buy enough life insurance so that, when combined with other sources of income, it will replace the income you now generate for them, plus enough to offset any additional expenses they will incur to replace services you provide (for a simple example, if you do your own taxes, the survivors might have to hire a professional tax preparer). Also, your family might need extra money to make some changes after you die. For example, they may want to relocate, or your spouse may need to go back to school to be in a better position to help support the family.
You should also plan to replace hidden income that would be lost at death. Hidden income is income that you receive through your employment but that isnt part of your gross wages. It includes things like your employers subsidy of your health insurance premium, the matching contribution to your 401(k) plan, and many other perks, large and small. This is an often-overlooked insurance need: the cost of replacing just your health insurance and retirement contributions could be the equivalent of $2,000 per month or more.
Of course, you should also plan for expenses that arise at death. These include the funeral costs, taxes and administrative costs associated with winding up an estate and passing property to heirs. At a minimum, plan for $25,000.
A multiple of salary?
Many pundits recommend buying life insurance equal to a multiple of your salary. However, this simplistic formula implicitly assumes no inflation and also ignores other sources of income, such as those mentioned previously.
