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Principles of Risk Management and Insurance, 13th Edition by Michael McNamara, George E. Rejda

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Amount of Life Insurance to Own

Once you determine that you need life insurance, the next step is to calculate the amount of life insurance to own. Some life insurers and financial planners ­recommend that insureds carry life insurance equal to some multiple of their earnings, such as 5 to 10 times annual earnings. Such rules, however, are meaningless because they do not take into account that the need for life insurance varies widely depending on family size, income levels, existing financial assets, and financial goals.

Two approaches can be used to estimate the amount of life insurance to own:

  • Human life value approach

  • Needs approach

Human Life Value Approach

As noted earlier, the family’s share of the deceased breadwinner’s earnings is lost ...

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