Even if you know why you need life insurance, there is no simple answer to the question
of how much is enough. Most people buy life insurance to replace income that would
be lost with the death of a breadwinner. The policy provides funds to help replace
the deceased's paycheck and may also provide income for long-term needs, such as
retirement, college costs or estate taxes.
Life insurance also provides money for immediate needs, such as expenses for final
illness and burial. And some people use proceeds from life insurance policies for
readjustment money -- temporary funds for family members who will need time to make
important decisions about moving or looking for a job. In essence, it is up to the
individual purchaser to figure out how much life insurance is enough.
Some experts suggest that life insurance should equal five times your total annual
take home pay. However, this rule of thumb may not always apply because no two families
are alike. You will need to answer some important questions about yourself before
deciding how much life insurance to buy.
Are you a young, single person with few or no responsibilities for others? A single
parent with children to support? About to retire and caring for your own parents?
Are you a parent with dependent children? A middle-aged widow or widower with no
children, but a parent to support?
These are not idle questions. If you can identify your responsibilities, your financial
resources and, in the event of your death, who should be protected financially and
in what amounts, you will make a wiser insurance purchase.
By completing the Personal Financial Statement that follows, you will have an excellent
basis for analyzing your life insurance needs. Be sure to include your spouse as
you carefully consider the portrait you are creating of yourself and your family's
future needs -- and how you can best meet them.