When it comes to life insurance you cannot have enough. But, obviously there has to be an upper limit, right?
This is the most common question when it comes to life insurance, and a lot of different people have a lot of different answers. The way I see it, there are a couple of ways to approach this problem, but first you’ll have to answer some questions.
What do you want Life Insurance for?
The #1 goal of life insurance is to replace your income. That’s what everyone says, but what does that mean?
Replacing your income could be actually providing 5-10 years of actual income or by providing enough money to earn that income via investing. If you can earn 3-4% interest per year on an investment, $100,000 of life insurance becomes $250 a month for your family.
Another question is how long will you need to provide for your family? If you want to replace your income until your kids graduate college or until the mortgage would be paid off, you’ll need to do the math and figure out exactly how many years that will take.
What Existing Debts/Bills does your Paycheck Cover?
Take the time to look into your debts, such as a mortgage, college tuition for your kids, car loans, your partner’s student loans (your student loans are forgiven when you pass), credit card debt, and other expenses (e.g. medical debt, funeral expenses, and anything else you might pay/owe). Your life insurance should ideally cover your loved one, if not completely, then well enough that they can handle it on their own if you pass.
You should also consider your savings and existing life insurance policies you might already have.
After you do the math, you should have a ballpark estimate for the minimum life insurance you want to aim for. There is a problem with this method, if you end up putting more money into your life insurance than you do to paying off your debt, well, you’re betting against yourself. You’ll want to find an affordable policy that also doesn’t break the bank.
How old are you?
If you’re young, life insurance is cheaper. But if you’re older that doesn’t mean you missed the boat. Across their lifetime, a young person’s cheaper premium will end up costing a similar amount as an older person, they just had a longer time scale to pay it.
An older individual needs to keep retirement and savings in mind when they’re weighing their options. But older people also tend to have more in savings and thus might be more able to afford a pricier monthly premium.
Obviously, a younger person should consider the same thing, but they need to pay closer attention to their situation. Do you have a family/are planning to start one soon? Then a bigger policy might be necessary. If a family isn’t in your immediate future, you can delay getting a plan or settle for one that’s lower.
Who are you Taking Care of?
If you live in a split income house, life insurance is a must. You don’t want to leave your partner high and dry. If you’re the sole provider for your family, then that’s doubly true, and you’ll want to make sure you get a bigger policy.
General Rules of Thumb and Why you shouldn’t Trust General Rules of Thumb
With all those conditions out of the way, let’s get into the specifics. Financial advisors, investors, and your grandpa all will probably advise you to get around 6-10 times your annual income. This value was painstakingly researched and entirely made up.
If it wasn’t clear by all the stipulations, there is no perfect number you can get. There are too many variables. BUT, at the end of the day, 6-10x your salary is a good call.
If you’re young, don’t have a lot of debt, and don’t have any dependents aim for 5-6x your salary. If you can do that without dramatically limiting your monthly income, then you’re set.
If you’re older, have some debt, or have dependents, get closer to 10x. Its that simple!
If you have any more questions, we have a life insurance expert on our staff! Click here to book a meeting with him. He can help break down how much you need and how to find a plan that fits your needs!