How Much Is Enough Life Insurance?

Several options exist for determining how much life insurance you need. The easiest method - the industry's rule-of-thumb -- is to multiply your annual take-home pay by some factor between five and 10. Most consumers split the difference and simply use seven. (Remember, life insurance benefits are not taxed, therefore there is no reason to replace your pre-tax income.) This rule-of-thumb approach, however, is not very accurate and may not fund all that you need it to fund, such as a child's education or the ongoing expenses of a sibling with special needs. A better method is to more accurately define what financial needs an insurance policy must protect. To that end, start by estimating the family-expense fund, or the amount of money the surviving spouse and any children will need to live on through the years. Fill in all the green-shaded boxes: Family-Expense Fund 1) Your monthly income 2) Amount of monthly income, in percentage terms, you wish to insure. 75% to 80% is a good estimate. This covers necessities: food, utilities, clothing, transportation. Include the mortgage payment here if a surviving spouse will continue to pay that monthly expense. Exclude it if you want life-insurance benefits to pay off the remaining balance; we'll factor that into this worksheet below. 3) Surviving spouse's monthly take-home pay, if any, and Social Security survivor's benefits. You can find Social Security's survivors benefits on your annual benefits statement mailed to you each year by the Social Security Administration, or by going online and requesting a statement at www.socialsecurity.gov. 4) This is the amount of money in excess of the family's monthly necessities. You likely do not need to insure a large percentage of lost income, though you can, if you'd like, on Line 5. 5) $ 6) Number of years that life-insurance benefits will be necessary.Since that can be tough to gauge, the safe assumption is to insure the income for as many years as it takes your currently youngest child to reach college graduation. 7) Your Family Expense Fund, the amount of money necessary to for a surviving spouse to pay the daily costs of living: -

Your Family Expense Fund, the amount of money necessary to for a surviving spouse to pay the daily costs of living:

Future Family Needs On the lines below, insert the cumulative costs for each of the items. With some, such as child care, you'll need to annualize the monthly costs and mulitply that figure by the number of years you'll need to ensure funding for that cost. So, for instance, if you pay $600 a month in child care and a surviving spouse would need to cover that cost for, say, four more years from today, then your need is $600 x 12 x 4, or $28,800. Family-expense fund Child care Emergency fund Mortgage payoff Debt payoff College costs Retirement fund for surviving spouse Other Other Other Total Family Needs Current Assets Next, we'll calculate the assets your family already has accumulated. These are assets a surviving spouse can draw upon to pay for the family's financial needs detailed above: Cash/Savings Home equity Investments Stocks Bonds Mutual Funds Other Other Other Sub-total Retirement plans IRAs 401(k) Pension Other Other Other Sub-total Current life insurance Other assets Total Assets $ $ $ $ -

Insurance Needs Total Family Needs Total Assets $

- $
$

Insurance Needs

Adapted from "The Wall Street Journal Personal Finance Workbook," by Jeff D. Opdyke.

Copyright 2006 by Dow Jones & Co. Published by Three Rivers Press, an imprint of the Crown Publishing Group, a divisi

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