Insurance Insights: Calculating Life Insurance Coverage
When calculating how much life insurance to purchase for your family, begin by figuring out how much it would cost to replace half of your pretax earnings until retirement. An easy way to arrive at this number is to divide half your pretax earnings by 0.05. To that number, add your mortgage, college expenses for your children (using current costs), and the amount needed to cover funeral expenses and other debt. If your spouse works, follow the same formula, and plan to purchase at least that amount of insurance to cover child care and other expenses until your children reach middle or high school. Use that number as a starting point to add additional coverage if extra costs are anticipated.
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Quick Tip: Term insurance is relatively inexpensive in that a healthy 30-year-old man can purchase a 20-year, $500,000 policy for under $250, while a woman would pay about $30 less.