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How Much Life Insurance? - Rules of Thumb

John W. Hurley

Two common rules of thumb that can be used to determine life insurance needs are six to ten times your annual earnings. Therefore, if your annual salary were $50,000, this approach would indicate that the amount of life insurance you need is between $300,000 and $500,000. BE CAREFUL! These approaches do not factor in differences among individuals. For example, your age, does the surviving spouse work, what are the ages of the children, what is the amount of debt you owe or is there an estate tax upon your death. Your employer typically will provide you with a certain amount of insurance and may typically start at $50,000 and can also be a multiple of your annual earnings. Employers will provide some insurance as a benefit because the tax law encourages employer provided insurance by allowing a deduction for the premiums paid up to $50,000 in coverage. You should really evaluate whether your employer provides adequate insurance coverage and if it is not adequate you should seek additional coverage. Many times your employer will offer additional coverage at the group rate, which may cost less than buying insurance on your own. If, for example, your employer provides insurance up to two times your salary, you are already below the rules of thumb discussed above and you would probably below the amount required using the methods that follow.

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FinPlan.com offers several online tools and calculators as well as some software programs from FinPlan, Inc. FinPlan started developing software in the 1980s developing 10 programs covering several personal finance topics.

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