Life insurance is important and should be purchased before you need it. Even if you nod in agreement, you may be wondering, “How much life insurance do I need?”
The short and sweet answer is 10-12 times your annual salary. Why ten to twelve times? Because if you die, that amount replaces your salary and provides your family with a comfortable financial cushion while they grieve. It also provides them with funds to invest for future earnings. Purchasing 10-12 times coverage ensures that your family will not face financial hardship when you die. Let’s take a look at how to calculate your magic number. And don’t undervalue yourself you’re worth more than you think!
How Much Life Insurance Do I Need?
Let’s get right to it: you need coverage that is 10-12 times your annual income. Make it a level term life insurance policy that will last for 15-20 years.
We are all aware that a death in the family is a devastating blow, and real life is about more than just numbers. You don’t want your family to be concerned about money while they’re going through such a difficult time. That is the purpose of having life insurance.
When you set your death benefit (also known as payout) at 10-12 times your income, you ensure that you replace your salary and then some. It appears to be a lot. However, that much term life insurance is actually quite affordable for most people. Furthermore, you want to make sure that your family’s future needs are met as well as their immediate ones.
What Does Life Insurance Cover?
- Individual Annual Income $0 Family Retirement
- 401(k), IRA, and Roth IRA are examples of savings and investments.
- Medical debt, loans, credit cards, and home mortgages are examples of debt.
The reason we say you need a policy for 15-20 years is also simple: if you have young children, they’ll be out of college and able to support themselves by the time the term life policy expires. The only coverage they’ll require is in the interim, when they’re completely reliant on you.
During those 15-20 years, if you’re following our Baby Steps, you’ll be busy building an emergency fund and investing in mutual funds. So, by the end of your term life insurance policy, you’ll be “self-insured” and no longer require life insurance.
What Is Life Insurance Covered For?
Although it may sound morbid, life insurance only covers one thing: your death. (It should technically be called death insurance, but who would buy that?) Term life insurance’s sole purpose is to pay a death benefit to your beneficiaries (your family) if you die during the policy term.
As previously stated, it covers bills, expenses, and anything else necessary for your dependents to survive if you are no longer present. When you purchase a policy worth 10-12 times your annual income, your family can invest the proceeds in good growth stock mutual funds and use the growth of those investments to replace your income for many years.
Assume we have a friend named Alex. He’s a 30-year-old office worker making $40,000 per year. He is married to Sara, with whom he has two young children. Sara stays at home with her children. When it comes to life insurance, this is what Alex and Sara are considering
Multiply your annual salary before taxes by at least ten. If you’re in a job where you expect your salary to rise in the next 5-10 years, factor that into your calculations. Alex makes $40,000 per year before taxes. That means he needs a term life insurance policy with a death benefit of at least $400,000 if he dies.
Parenting at Home
Your stay-at-home parent may not be working outside the home, but they are providing an important service to the family. Let’s take a look at Sara. She is a stay-at-home parent. That means she’s responsible for the children, the household, the kids’ Uber driver, and everything in between. For “nothing”! Sara should get her own term life insurance policy with coverage ranging from $250,000 to $400,000.
If you have children, they rely on your income to support them. Alex and Sara have two children, ages three and six. That means they’ll be dependent on their parents for the next 15-20 years. Not only are school and college fees involved, but so are medical bills and extracurricular activities. This is when 10-12 times your annual income coverage provides your children with a secure future until they are able to support themselves.
Some people who do not have enough money in the bank will use life insurance to cover their funeral expenses. The average funeral nowadays costs a whopping $7,848.1. Another option for paying for your funeral is as follows: Set aside $50 per month and invest it somewhere (such as a good mutual fund), and your money could grow to be more than enough to cover your funeral costs.
What Kind of Insurance Do I Need?
Term life insurance is the type of life insurance that we always recommend. Term life insurance works as follows: it lasts for a set number of years (reminder: get a term lasting 15-20 years), and the monthly premiums are always lower than those for permanent or whole life insurance.
What will it cost?
Age, health, and lifestyle all influence the cost of life insurance. Alex is in good health and wishes to purchase a 20-year term life insurance policy with a death benefit of $400,000. What will he pay? Around $18 per month—less than what he spends on coffee!
Dave suggests term life insurance because it is inexpensive. You can receive 10-12 times your income as a payout, and you can select a term length to cover the years of your life when your loved ones rely on that income.