Test the Rule of 3.6%
How do you know if you own enough life insurance? Life Insurance can never replace a husband, wife or parent, but for most it’s intended to restore the income a family depends on in a loved one’s absence. The Rule of 3.6% might be helpful in answering how much insurance you should own.
Here is the simple calculation:
Let’s say you own $250,000 in life insurance, $120,000 of which is intended to pay off the mortgage at time of death. Your beneficiaries would be left with $130,000 to invest or allocate for other purposes. You may think, “That looks like a proper sum.” But how can you evaluate how this remaining $130,000 might provide toward the monthly income your spouse and children will need?
The Rule of 3.6% is a simple guide to estimate the approximate monthly amount your life insurance proceeds might provide if invested with a return of 3.6%.
Test the formula for yourself:
Take $130,000 and cross out the last four numbers. That leaves 13. Multiply 13 by 30. That equals $390 per month.
If you find this monthly income amount surprising small, you are not alone. Even when major family debts are paid off, a monthly income amount this small may present a financial challenge that is too great for your family to overcome.
Most people never prepare to leave their loved ones to struggle, but very few evaluate their life insurance needs with this simple formula. With so much at risk, why not ask us for more information? You may be pleasantly surprised by the affordability of different life insurance choices.
Source: Note: The investment return example of 3.6% is hypothetical and for illustration purposes only. It does not indicate or assume any specific account or investment recommendation. This calculation does not take into consideration all the factors considered in a complete analysis.