How often should I be evaluating my life insurance needs? How do I know if I have enough insurance?

HOW OFTEN SHOULD I EVALUATE MY LIFE INSURANCE?

Your life insurance needs should be evaluated annually but that is not always practical. It should be reviewed at least every time there is a major life change. Think marriage, divorce, birth or adoption of a child, loss of a family member and every job modification including promotions and raises. Although change usually creates a busy distraction at the time, don’t wait to evaluate as it may be too late.


HOW DO I KNOW IF I HAVE ENOUGH LIFE INSURANCE?

Some agents would state you need 12 to 14 percent of your annual earnings in life insurance. I believe there are more practical ways of determining the right amount of life insurance for you.
The most important is what you can afford. Life insurance is a long term investment so be sure that you are able to set aside the required premium for the foreseeable future. Making that determination first will lead you more easily to the right decision of the type and amount of insurance needed.
Then determine what need you want life insurance to solve?
• Pay off home
• Provide funeral expenses
• Replace your income
• Debt payoff
• Ensure college funds for your children
This may lead to an amount of life insurance to cover your specific needs.
There are many life insurance calculators available and most agents can assist you with very specific refinements for your needs. However, you will need to be prepared to determine your assets, your short and long term expenses, and your income. Try AARP.com (Home »Money » Saving & Investing »Life Insurance Calculator) for a free life insurance calculator that is easy to use.

Here is a super simple way to know how much is the right amount. Look at how much it cost to get your family through the last month of life (shoes/food/insurance/all of it).

Closer to 4K or 6K? If 6K, subtract 1K as your portion, because you are not with us anymore when the benefit triggers. At 5K per month, your family needs a 60K "bucket of money" to keep living like they are living now - for 1 year. That would be a 600k benefit for them to have a 10 year "bucket of money" to live like the are living now, but for the next 10 years. There is your baseline. Go for more or for less, go for what you can afford, go for fewer years than 10, etc., but you can see the logic of this simple "look back" approach that uses your personal situation and hard costs to come to a usable answer.

Every 3 years or when major changes occur in your life. There is no right amount of life insurance as your life and the economy will change over time, but nobody ever received a death benefit check and said it was too much money. A simple technique is to subtract your age from your expected retirement date. Multiply the result by your current income. Some will say to use 85% of that amount, but your wife might prefer to have all of it. It's a personal decision.

Enough insurance is based on human capital: Multiply what you make by the number of years your will be working.

Evaluate every time there is a life change: i.e birth of baby, job change, increase in assets, new home.