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wundayatta's avatar

How much life insurance, in relation to your net worth, should you purchase?

Asked by wundayatta (58714points) June 26th, 2009

Personal resources are limited. Thus we can’t buy all the life insurance we might want. I mean, if we could afford it, would we all buy a billion dollars worth? Well, there is the moral hazard, that when you have too much life insurance, you have an incentive to find a way to die that isn’t suicide. So you want the maximum you can get that is less than the amount where it would be enough to make you be willing to die for your family.

What is that amount? Is it equal to your net worth? Twice your net worth? An amount that would make your family live comfortably for the rest of their lives? A fixed amount? Fifty thousand? One hundred thousand? A quarter million? Half a million? A million? Two million? Less? More? Should there be a maximum amount of life insurance anyone should be allowed to purchase? If so, how much?

Personally, I think I would have to be insured for more than ten times my net worth before I would be in danger of even thinking I’d be worth enough dead to consider becoming dead. If I were depressed, that amount could come down to equal half my net worth. However, in reality, I think there would be no amount of money to make me consider wanting to be dead. You?

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12 Answers

CMaz's avatar

Depending on how much you can afford or wish to spend. It is Risk Assessment.
It should at least cover your debts ( mortgage, car loan, credit bills) including funeral.
Then if you can, double that amount. That should be what you want your life insurance to pay out.
It all comes down to what you are willing to pay out every month for the next 30 years or so.
Insurance is not about making a buck, it is to prevent a catastrophic event from occurring. Like sticking your loved ones with debt.

Of course if you can afford it, put a million dollars of coverage in your wife and 2 million in you.
That should cover just about anything.

Lupin's avatar

~30 years ago the company I worked for gave us 2x our annual salary in coverage free. You could bump it up to 5x if you paid a nominal amount. A single guy, call him “Leon”, would approach other single guys without families and offer to make the other guy beneficiary in return for him doing the same. They would keep it that way until one of them got married. One of the newcomers died in an accident a couple of years later and Leon collected. Two years later another single guy died with Leon as beneficiary. The secretary in personnel “Ruthia” noticed the strange coincidence and called the police. He was later found guilty of murder. (Several other single guys were potentially in line!)
I’d make it enough to pay your bills plus less than 2x your annual salary. You don’t want to give anyone any incentive.

ragingloli's avatar

you don’t have anything from life insurance, other than relatives trying to make you die prematurely.

cwilbur's avatar

I need enough life insurance money to cover my debts and the cost of my funeral. Buying any more is pointless: I’m spending money so other people can benefit.

If I were in a committed relationship and we had mingled finances, I’d probably increase the coverage to the point where my income would be replaced for a year or so to give my partner the time to make the transition back to being his own sole support.

If I had kids, I’d probably increase the coverage further so that with any luck their education could be provided for.

But more than that? What’s the point? I won’t be around to spend it!

wundayatta's avatar

@ChazMaz I’m not asking about the purpose of life insurance. I’m asking at what point would you, personally, have too much life insurance. When would the moral hazard kick in for you?

@cwilbur The point is that you love your family, and you want them to be protected in case your income is lost, not just for two years, but for the rest of their lives. My wife says she’d be devastated, and unable to cope with work and family, both, for at least five years. Even after that, her ability to deal would not be so good. I’d want to leave enough that the kids can get through college and that she’d be able to have a good retirement. That’s as much as I need. However, if I could afford more, would there be an amount that I should not exceed? An amount that would make me value the money more than my life? Do you have such an amount?

CMaz's avatar

Moral hazard? As long as you keep within the law and you have the money. There is none.

Me and my siblings have talked about putting a million dollar policy on my father. He is all for it. We figure we would probably have to put in around 3 to 400,000 before he passed away. Not a bad return.
But, that is a big monthly expense for each of us. The wealthy do it all the time.
There is still risk, if in the process he offs himself before the first two years we are out. Or if he dies while skydiving.

cwilbur's avatar

@daloon: Since there’s no way I could directly benefit from the money, there is no amount of money I could get from life insurance that I would value more than my life.

wundayatta's avatar

@cwilbur Usually people consider helping their families in the event they die to be a benefit that makes it worth purchasing life insurance. If you don’t have anyone depending on you, then it really doesn’t make sense.

YARNLADY's avatar

When we had young children to support, and work-at-home wife, it was necessary to have at least 4 – 5 times Hubby’s yearly salary. We could have reduced it when the 10 year renewal came up, but by then, his salary had increased, as had our expenses, so we kept the same amount, which was now closer to 3 times his yearly salary. Smart Money has come excellent articles on personal finance, as does MetLife and our financial bible TheMotleyFool is always our go-to-site for all financial questions.

FireMadeFlesh's avatar

My parents have enough so my brother and I can pay off all their debts, finish our education living as normal a life as possible, and by that stage we will be able to support ourselves. I think that is a good amount, because if it were any greater they would have premiums so large life would be less pleasant than it should be, and if it were any less we’d be in a lot of financial trouble if they were to die.

walterallenhaxton's avatar

I don’t think that the word moral hazzard applies to this subject. You can never collect on your acts.
Anyway i think it is foolish to have any more insurance than it takes to bury you. That is enough life insurance for you. Then you should consider life insurance on you for your dependents and how much they will need to replace their dependency on you.
It is what they need to accomplish your desired result for them from you that determines the amount of insurance you buy.

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