We all know that anybody can die at anytime, and if you have a dependent, you will want them to be looked after if tragedy strikes. Even if you don’t currently have children, you might in the future, or might have an elderly parent. So how much life insurance do you really need?
A good, and basic, rule is to assume that a lump sum from life insurance will yield the beneficiary 4% per year for the rest of their life. In other words, $100,000 will yield $4000 per year, and $1M will yield $40,000 and so on. This does depend on numerous assumptions, of course. How conservative your loved ones are with money is one consideration, and how they invest the money after the death.
Before deciding on how much life insurance to get, also consider how much debt you have and savings. Imagine you have person 1, who has a partner who needs $50,000 of yearly income. This person also has $500,000 in assets that can generate an income such as shares and cash. Such a person should aim to get $750,000 of life cover, because 50,000×25-500,000 = $750,000. Now consider person 2 is in the same situation, but they have $50,000 of debt. In which case, $800,000 of life cover is more sensible.
Of course, these are only rules of thumb. If somebody has an elderly frail parent who is 95, one clearly doesn’t need 25 years of life insurance. In addition, if one has a partner who is likely to be able to generate their own income, or can partially rely on income from the state, that will also lower the amount of cover needed.
As you can ascertain by now, how much life cover you need is not simple. That isn’t an excuse for putting it off, however. Be prepared if the worst happens.