How Much Life Insurance Do You Need?

By Brant Duncan

July 31, 2013

When trying to determine the amount of life insurance you need, the first step is asking yourself a question. “If I were to die tomorrow, how much income would my family need to continue without my financial contribution?”

The rule of thumb is 25 times the amount of your annual income. For example, according to, the median income for Wooster, Ohio in 2009 was approximately $38,000. Take that number, multiply it by 25 and you get $950,000. Nearly a million dollars, this seems like a ton of money to leave to your family but it is not when we explain how it should be use d.

Larry Light, a contributor to wrote “A good conservative estimate for the yearly income that a lump sum generates is 4%.” The $950,000 that we used in our example, invested at 4% would generate for your family $38,000 a year.

How can this resident of Wooster that makes $38,000 a year afford close to a million in life insurance? A common mistake people make is to believe Life Insurance is too expensive. On average it is as affordable as cable television and most of us pay for this service on a monthly basis. How can we justify having a cable plan and not a life Insurance plan? The truth is that cable is one more thing they won’t be able to afford if they are left without a plan, they will continue to drown in bills that can’t be paid without your income. A life insurance plan can be the life saver that you throw to them in the storm.

There are two main types of life insurance, Term and Whole Life. Term is less expensive and offers an amount of coverage for a period of time 10, 20 or 30 years in which for that time you rent the amount of coverage. Whole life is a plan where you are purchasing the amount of coverage for the rest of your life and the payments you make to the plan build cash value.

Two tips to keep the price down are to stop waiting, the older you are the more expensive it becomes. Companies know that with age come more risks to your health. The next tip is to buy Term first; a characteristic of this type of life insurance is that it can be converted to Whole Life at the end of the time period. Buying term at a younger age will allow you to apply for another policy later in life without having to prove you are in good health.

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