It's a question that virtually everyone has wondered: How much life insurance is enough for my family? Similarly, financial professionals have received various permutations of this same inquiry.
As is so often the case, the answer isn't always clear cut. For the most part, insurance professionals and advisers have counseled that coverage should be roughly 10 times more than what a household earns per year. But with home prices showing no signs of slowing, as well as inflation rising much faster than wage growth, a safer bet is two times that figure, according to Marvin Feldman, president and CEO of the nonprofit organization Life Happens.
As an experienced insurance agent, the more well-acquainted you are with your clients, the better you'll be at providing truly reliable guidance about how much life insurance they should purchase. Even though each case is unique, here are a few smart rules of thumb to go by:
Size of family
It's pretty straightforward, but you may be surprised by how frequently life insurance policyholders fail to account for the size of their household, meaning how many individuals rely on the primary income earner. The more children they have, the more coverage that's needed. Also, be sure to ask about young adults who may still be living at home. For the first time in over 130 years, millennials are more likely to be living with their parents than a partner or spouse, according to a new study from the Pew Research Center.
Future cost considerations
Though many young adults pay their own way through college, the cost of tuition makes this difficult. If you know your clients plan on at least helping their kids pay for a university education, this should factor into their life insurance needs. Investopedia has an example of how much to buy depending on what a family earns in salary and has left in mortgage payments.
Several polls reveal that Americans have become somewhat inured to debt, understanding that it's something that virtually everyone has. Be sure to ask your clients about all of their expenses that have a balance, including credit card debts, car payments, mortgage, or lines of credit.
Estate taxes often have to be paid to the government after a person's death. Life insurance can help defray this expense. However, the amount that's owed may be more if your client has inherited money. Couples who receive $10.9 million in inherited wealth or more must pay federal estate taxes.
As far as calculations go, there are a multitude of life insurance calculators available online that can help you and your clients crunch the numbers.