Life Insurance. Where to begin? At the beginning is probably the best place. Insurance of all kinds is designed to protect you in the event of a loss that you could not otherwise afford. Insurance is where you have a known loss in exchange for an unknown loss. You insure your house in case it gets struck by lightning. You insure your car in case you hit a deer. So, how do you decide whether you need life insurance, and if you do, how much do you need?
Life insurance would deal with the financial consequence of dying too soon. If you are the parents of young children, you want to make sure you have coverage. This would take care of the costs of raising them, college, and weddings. Me? I am 58. My children are grown and no longer my financial responsibility. My mortgage will be paid off soon, and if I am really lucky, retirement isn’t too far off. The financial consequence of me dying is different than that of the young family.
Once you figure out if there is a financial impact of you dying too soon, now we have to figure out how much you need. First, figure out how long you are going to be dead. (That’s a bad joke but we need to worry about providing for the financial impact for some time in most cases.) The best way to start would be to take your current salary and multiply it by at least 20. If you make $50,000 a year you should start by thinking about buying $1,000,00 of coverage. If you invest the $1 million in tax free municipal bonds, your yield is about 3.5%. 3.5% of $1 million is about $35,000 a year. This should be close to your after tax pay.