How Much Life Insurance to Buy

My wife and I have a baby on the way. How much life insurance should we buy? My wife plans to work half-time while our child is young. --B.K., Washington, D.C.

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To calculate how much life insurance you need, use this method recommended by Tim Maurer, a certified financial planner in Charleston, S.C. Each of you should add up the amount you’ll both need for funeral expenses, your mortgage and other debts. Include any education expenses you anticipate. For college, use current costs.

Then calculate how much each of you would need to replace 50% of your current pretax earnings until retirement. To arrive at a lump sum, divide half your pretax income by 0.05, says Maurer. For instance, if you earn $100,000, divide $50,000 by 0.05, which equals $1 million. Add that to your mortgage, education and funeral-expense numbers for the amount of coverage you’ll need for yourself.

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If the number your wife comes up with based on her part-time earnings is less than $250,000, get that much anyway, says Maurer. You’ll need at least $250,000 to help pay for child care and other expenses until your child is in middle or high school. If you plan to have more kids or anticipate other big expenses, bump the amount up to $500,000.

Term life coverage doesn’t cost much. A healthy 30-year-old man can buy a 20-year, $500,000 policy for $244 per year; a woman would pay $214, says Byron Udell, CEO of AccuQuote.com. For $1 million in coverage, the man would pay $421 a year; the woman, $354 per year. If you plan to have more kids, consider a 30-year policy, for which the man would pay $704 for $1 million and the woman, $577.

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.