How much life insurance coverage I need to buy was something that really wasn’t important to me until I got married. My first policy was a $250,000 30 year term life policy and I thought that was plenty. It was not until we had our first son that I quickly realized that was not nearly enough. After his birth, I decided to increase it substantially. That was over two years ago. With us in the process of building our first home and a second son on the way, I’m left wondering even with that increase if I really have bought enough life insurance. I know many struggle with this same decision so I wanted to shed some light how much life insurance is enough.
First things first, life insurance is for one purpose: income replacement. While there are times where life insurance can aid in more complex estate planning strategies, a majority of the time it’s purchased to take care of your family once you’re gone. My reasoning for purchasing life insurance is that I want to leave my wife and kids without any debt and the ability for my wife to not worry about finances in the event of my unexpected passing.
Life Insurance Coverage to Buy Rule of Thumb
As you can imagine, how much life insurance you need to buy will differ for each person. As a general rule of thumb, it will be a multiplier of your current income based on your age. To illustrate here’s an example that you can use:
Life Insurance Table
Life Insurance Needs Analysis
To determine how much term life insurance you need, you need to perform a needs analysis. Here’s a step by step guide to calculate how much insurance you might need.
- Total annual needed by your spouse and children in the event of your death.
- Number of years you would like to provide this income to your spouse or children.
- Your gross income annually.
- Your date of birth.
- Your spouse’s gross income.
- Would you like to pay off any outstanding debt? For example, mortgage, loans, credit cards, college. If so, enter the debt amount.
- Burial expenses. That can include funeral, probate, and any other legal matters.
- Total amount of your existing life insurance.
- Interest rate assumption. This assumes the interest death benefit proceeds are invested.
Life Insurance Coverage Example
To help illustrate how much life insurance you might need to buy, looks look at an example. First, let’s consider some assumptions. We’re looking at a 30 year old male who makes $100,000 a year. He wishes to give his wife a $75,000 a year income for 30 years if he were to die unexpectedly. We’re also assuming that the wife works and makes a $35,000 a year income. The final assumptions is that there is $400,000 of outstanding debt to pay off (for example, a mortgage and student loan debt), $10,000 for burial expenses and a 6% growth rate on the proceeds.
Life Insurance Example
Life Insurance Amount Needed
Based on the above assumptions, the husband would need to buy $993, 629 of term life insurance. The calculations are as follows:
Life Insurance Needed
Shop Around
When buying life insurance, be sure to shop around rates. I’ve seen life insurance companies differ greatly in their premium amounts. To give you a gauge of what to expect to pay, the $250,000 policy that I mentioned that I took out when I was 28 cost me around $220 a year. That’s it! A couple reasons that it was so cheap was:
- I was young (why does that seem so long ago?)
- I was (and still am) in good health.
Nonetheless, that’s a small price to pay to ensure that your family is taken care of after you’ve gone.
photo credit: karmablue
Securities offered through LPL Financial, Member FINRA/SIPC
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Thanks for the reminder – this is still on my financial “to do list”. I know I need to do it, but just haven’t yet. I don’t have as much need as you do with the little ones, but I still want to make sure my wife is ok if I die.
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Should it all be term? Are there any other purposes to life insurance besides income replacement and debt coverage?
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When do you usually begin getting life insurance? At 24 I have not once even thought about it.
@ Craig
If you are single and no dependents, then for the most part you shouldn’t think about it. My focus would be maxing out that Roth IRA. If you know that one day you will have kids and a family, you could look into now because it would be a whole lot cheaper. And if something happened between now and then that could affect whether you could get insured. In my own example, I didn’t get any life insurance until after I got married.
My husband and I started thinking about life insurance when we bought our first house (age 27). In fact we had to get some to get a loan. Then we increased it when he finished residency and started a medical practice (hey you get used to a certain income and you don’t want to go back to your old ways! – age 32) We upped it again when we bought a bigger home and I stopped working permanently (age 36). We’ll up it again if we ever start having a family. Life insurance is cheap when you shop around.
Coincidentally we have it on me. Right now we have a small policy since I don’t work, but I wouldn’t want my husband saddled with any money issues should he take time off from work if something happened to me. If we have kids we’ll probably get a million dollar policy for me. Someone’s got to clean, cook, chauffeur, cut the grass and do everything else I do now. Not to mention that I may need to go back to work at some point to help finance college – we’d want that money replaced. So don’t just insure the bread winner – insure ALL the work done in your house. And insurance on women is even cheaper than on men. A quarter million dollar policy for a healthy 35 year old woman is about $10 a month.
I think KC makes a great point: Just because you don’t have an income, doesn’t mean that what you do isn’t valuable. All of the things that KC does would cost a substantial amount for someone else to do, and that should be considered when thinking about life insurance coverage for a stay at home spouse.
Anyway, in my case, we have a larger policy on me, since I am the primary breadwinner, and I stay at home. My husband is still in school, so his policy is just enough to pay off the mortgage and the student loans, plus the car loan. When he’s done, we’ll probably increase his coverage.
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Very clear and informative post thanks – I’ve bookmarked this because I’ll be looking for life insurance again soon and this can help me plan what our requirements should be. We had it when we were homeowners, but the policy was sold twice to different companies. Then we moved abroad and it was difficult to contact the new company and confirm the details of the policy (eg, would it cover us overseas). It was expensive too, so we cancelled it – I still wonder if that was a mistake but we’ll make a start with a new one soon.
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Dave Ramsey recommends 10 times your income. 20 times seems extreme, but if you can afford it having more sure cant hurt.