Gary R McCarty

The appropriate way to appraise a person’s entire life after he or she is gone is a topic that has been debated by philosophers throughout the ages. Certainly, there are as many factors as there are ways to approach them. One measure of a life is the effect that the person’s death has on those close to him or her. For those with dependents, this effect can be substantial.

One way to help mitigate the financial blow of the loss of a head of household is through life insurance. Yet in a recent survey, even though most people agreed that everyone should have some form of life insurance, only 20% felt that it should go beyond just covering bills and funeral costs and should replace the income of the deceased in order to support dependent family members.1

However, if you have dependents, the loss of your income could put your family in the difficult position of trying to maintain its standard of living on a much smaller budget. Life insurance can be a tool to help replace the lost income. But how much insurance is enough?

No Rule of Thumb
Some people recommend that life insurance be high enough to replace an equivalent of seven or eight times the annual salary of the insured. Yet this old rule of thumb may not be the best guidepost for someone with no children.

To determine how much life insurance coverage may be appropriate for your family, consider your dependents and their ages. How long would they be expected to need support? Would there be enough funds for college? Would you want the mortgage to be paid off?

Don’t forget about other benefits that might be lost along with your salary. For example, if your health insurance is provided by your employer, your family may need replacement coverage.

Remember that the cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable and to consult a tax professional.

As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications.