How Much is Enough Life Insurance?

Last year, we published a newsletter discussing Long-Term Care insurance and some food for thought around the common question “Should I consider Long-Term Care insurance?”  In keeping with this theme, I (Russell) would like to similarly address another common insurance question, “How much life insurance should I have?”  Although the short answer to a question like this is “it depends”, I think it is important to understand some fundamental guidelines.  However, before we can begin to look into this problem, just like addressing Long-Term Care, we must first understand the problem we are trying to solve and if insurance can provide a solution.  Below is in excerpt from our previous newsletter:

Insurance is by simple definition the transfer of risk from one party to another in exchange for compensation.  For example – If my car is totaled in an accident, I’d want a new one to replace it.  I can accomplish this in two basic ways:  Option 1 – I can set aside my own money in reserve to cover this cost should it arise; Option 2 – I can pay an insurance company to take on the risk of having to buy a new car in the event of an accident.  If we really think about it, the car is not really what I am trying to protect.  I am trying to protect my own assets from loss – i.e. my money.

The question “How much life insurance should I have” can therefore be reworded to “If I passed away, what financial impact would that have?”  No one can be replaced as a spouse, parent, or sibling – however, in many cases, we are providing for the financial wellbeing of others.  If this is true, then life insurance may provide a solution to reducing this financial risk.

With this in mind, to answer the question, “How much life insurance should I have?”, the best place to start is calculating an individuals expected financial contribution.  To get a deeper understanding of this figure and its variables, we’d highly recommend you consult your financial professional.  To give yourself an initial starting point, you can take your current income and multiply it by how many years you plan to work.  This would give you a rough estimate of how much you’d expect to contribute over your lifetime financially to your family.  Now, again, a lot more needs to be considered such as raises, future value vs present value of money, debt, expected changes in expenses, etc.  This also does not address the many different types of life insurance.

If you have questions about your current life insurance policies or would like to review your overall plan, please don’t hesitate to reach out to us.

This material is for informational or educational purposes only.

Signature Wealth Management Group is registered as an investment adviser with the SEC. Signature Wealth Management Group only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements.

Neither the named representative nor Investment Advisor gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your tax professional for specific guidance.