Talking about life insurance is never a very happy subject. Besides the fact that you’re talking about your own death, you’re also considering all of the pain and heartache that your loved ones will go through afterwards. Life insurance can help ease that pain somewhat, but there’s only so much money can do.
As far as how much life insurance you should carry, it all depends on your situation. Here are a few examples.
When You Don’t Need Life Insurance
Paying the premium for life insurance doesn’t make sense to everyone. If you have no dependents and enough financial assets to pay for everything (such as the funeral), there’s really no need to get it. Even though it might be a nice gesture to get it to go towards your parents, sibling or a good friend, it’s not required.
When You Don’t Need Much
Another example is if you do have a family but maybe your spouse is the major bread winner. Whether you don’t make the majority of income or you watch after the home and kids, at the end of the day you probably don’t need a huge life insurance policy.
Does that mean you can’t get a higher one? No, and it may actually make sense to do that if your death would leave your spouse raising kids all alone.
Likewise, maybe you’re in the first situation. If you don’t have any dependents but want to be able to give your loves ones a parting gift when you leave this world, you can consider getting a smaller life insurance policy.
When You May Need a Lot
If you have a family with dependents and you are the primary bread winner of the home, it makes sense to get a larger policy. You don’t have to make your family millionaires upon your death, but you should consider taking a large enough policy that they can continue living at a similar lifestyle after you pass away.
One good way to do this is to consider how much money your family uses each month right now. Then you can reverse engineer how much money you would need to invest to passively make that money every year.
For example, let’s say your family uses about $4,000 a month to live, or $48,000 a year. Assuming you can get about 5% of average returns by investing the money from your life insurance, you’d need about $960,000 to invest. Sadly, that means you’d actually need a policy of about $1.2 million, because of the fees and taxes your family will have to pay on the policy.
But that’s just one way to do it. That’s assuming your family’s bills will never go up or down, your spouse won’t get a job to support the family, etc. These are other factors to consider, so you can see it isn’t just a black or white formula to figure this out.
At the end of the day, your safest bet if you have a family is to be conservative and have a higher policy than you think you need. Remember that your family will end up paying a lot in taxes and fees, and it takes a huge chunk of money invested in secure vehicles (such as bonds) to provide a decent income.