The answer to that question has changed some over the years. In the 70’s the rule was that you could pretty much buy all of the life insurance you could pay for. If you made $20,000 a year and wanted to use half of that to buy a $10 million dollar life insurance policy, you wouldn’t find many companies that would turn you down.
Somewhere along the line insurance companies decided that was bad business. Something just didn’t ring true when middle income families suddenly became wealthy when the husband died.
Now I’ve got to be honest. I would hope that the life insurance I have in force would allow my wife to continue the lifestyle that we’ve shared if something were to happen to me. Being very good with money and without the extra expense of me, she might even be financially better off. But wealthy? I don’t think so.
Companies are all over the map with their earned income replacement guidelines, so I am throwing out probably the most liberal of them just for the sake of discussion. This is based on a multiple of your income based on your age. The logic of a lower multiple as you get older is that there should be less years that income would need to be replaced. I don’t happen to agree with that premise.
1. Up to age 30, 30 x annual income
2. 31-45, 20 x annual income
3. 45-60, 10 x annual income
4. 60 or older, 5 x annual income
I really don’t have a problem with the younger ages and 30 x annual income. The reality is that if you were making $50,000 and left $1.5mm behind, your wife and children would probably do just fine and at that age there is plenty of time for education and seeking other avenues to rebuild her life.
I have a real problem with 10 x annual income at age 50. It might be adequate in some cases, but the ability to rebuild your life at that point is less and with mortgages and other debt, 10 x income might not really provide any income at all. It might leave a wife debt free, but debt free doesn’t put food on the table.
I agree that insurance companies shouldn’t sell whatever a person wants without justification, but it is rather ignorant on their part to ignore good sound financial planning by capping life insurance with a one size fits all multiple.
Bottom line. A good independent agent can help you determine what you really need, and if one company isn’t willing to provide what you really need, that agent can package two or three companies together to make sure your family is taken care of.
This post is somewhat dated. Life insurance underwriting is changing and evolving continually. For more updated information check out some of the key word links. If you have a specific question or topic you need information for do a search. If you don’t find the answers you need contact me and we’ll make sure you get the information that is important to you.