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How to Choose the Right Amount of Life Insurance

When it comes to figuring out the right amount of life insurance to buy, it’s tempting to rely on rules of thumb, such as purchasing a multiple of your annual income—say, 10 to 15 times your salary—as a death benefit. That would at least ensure that your family received that income for a specific period of time. If you have young children, for example, and your stay-at-home spouse needs to return to work, you may want to fund additional child-care costs, as well as college educations. You may have mortgage and credit-card debt to pay off, or elderly parents who need financial support. It makes sense to subtract any savings or current coverage (if you intend to keep it) from your financial needs. But you will also want to increase the coverage amount to account for future inflation.

The simplest and cheapest option is term life insurance. You pay a yearly premium in return for a fixed death benefit that goes to your beneficiary if you die while the policy is in force. With a term policy, you get the most benefit per premium dollar, says Steven Weisbart, chief economist of the Insurance Information Institute, an industry group that provides consumer information. That frees up more of your cash flow for other expenses, such as for your kids’ college educations or for retirement savings.

​When your term policy expires, you often have an option to convert it to permanent, or cash-value, insurance, which combines a death benefit with an investment account, as we explain below. By converting, you avoid having to get a medical exam, as with a new policy. But this option will be more costly than your current term coverage.