Life Insurance Coverage
How much life insurance coverage do you need?
If you have dependents, that should be the first question you ask, when you start planning for the future. If your children need your income in order to live, that is a precious asset. Life insurance can protect it immediately, as opposed to the many years required to save and invest to build a nest egg. Once your life insurance is in force, the company will pay immediately if you should die.
There are several ways to arrive at the life insurance coverage you need to protect your loved ones. Let's assume that you don't yet have a retirement nest-egg (or just a partial one), and your income is what is being used both to support your loved ones and to build up that nest egg. The following tool will walk you through a few questions and arrive at the life insurance coverage you should have in place.
Another (simpler) rule of thumb to get a first cut at the amount of coverage you need for life insurance, just use 20 times your annual, after-tax income. That basically assumes you need the coverage for 20 years, and the rate of inflation will be cancelled by the return on investment realized by your beneficiary.