How Much Life Insurance Should I Have? Many people shopping for life insurance are asking themselves how much they should have. The answer can be straightforward as well as very complex and will vary by individual. I am going to breakdown how much you should need with a few simple steps.
Typically when figuring out how much insurance one needs, a flow chart would come into play. At the top, the question would be, are there any other people dependent on your income? If you answered no, then you would go to the question of is there someone you would like to assign as a beneficiary to pay for your funeral services or anyone that needs a death benefit should you die. For someone like this, you are probably looking at $25,000 to $50,000 in life insurance. For those with a family or a spouse dependent on their income to maintain a particular lifestyle, the answer is much more. Many people are underinsured when it comes to life insurance. Do not make the same mistakes as other people from the past.
There are several different life insurance kinds, but we will not get into that topic in this article. For more information, please view “What Kind of Life Insurance Should I Buy?” with a link provided in the author’s signature. Now, as far as how much life insurance one needs, you need to add up all your debt—mortgage, student loans, vehicles, etc. Let’s say that equals $225,000. Now you take your age and years until retirement if you didn’t have any debt. Let’s say you are 45 with 20 years until retirement but being debt-free; you could retire in 10 years. You are making approximately $50,000 per year in this example with ten years left to work. That is $500,000 plus your $225,000 to pay off your debt. Add in an additional $15,000 in burial costs, and you are at a total of $740,000 in life insurance needs. Now, if you have children that need to go to college or other variables, you would add them in now, but for simplicity’s sake, we will say we are done with the addition math.
Now to know how much life insurance you need, you will have to subtract from that number. Your raises each year might equal a whopping 3% of your income, keeping you up to speed with inflation. But if your survivors were to receive $740,000 tomorrow from your death, they would probably see closer to a 6% or 8$ return on the money that isn’t being used to pay off debt. This brings the magic number down to approximately $650,000. There are compounding returns involved, and the math is too complex to get into. You probably have some money in retirement already, which will make up for the minor fluctuations in inflation.
For a much simpler rule of thumb, you could also say you need enough to pay off your debt plus seven years of income. This math would take you closer to a $600,000 policy. There will be several other variables to consider based on your financial situation so please visit a licensed professional for consultation on how much life insurance you need.