How Much Life Insurance Do I Need?

Life insurance is important - and worth having before you really need it. If you’re nodding in agreement but also wondering How much life insurance do I need? you’re not alone! 

Even though we can’t predict when our time is up, we can control how much of a life insurance payout our loved ones will get when we die. What better way is there to lift those financial worries from your family’s shoulders?  

Let’s look at how to work out your magic number. And don’t sell yourself short; you’re worth more than you think. . .

How Much Life Insurance Do I Need?

Let’s get straight to the point: Dave says get coverage that’s equal to 10-12 times your annual income. And make it a level term life policy that lasts for 15-20 years. 

Why 10-12 times your annual income? Because it replaces your salary if you die and gives your family a financial cushion to help them get back on their feet. It gives them some funds to invest, where the interest coming in every year could provide vital income in your absence.  

How much life insurance do you need? Find out with our free calculator!

The reason we say 15-20 years is simple: if you have young children, by the time the term life policy is over they’ll be out of college and able to support themselves. The only coverage they’ll need is during those 15-20 years in between - when they’re totally dependent on you. 

If you’re following our baby steps you’ll be busy investing your money during those 15-20 years in areas like mutual funds. So by the time your term life insurance plan is over? You’ll be “self-insured” and won’t need life insurance.  

What Does Life Insurance Cover?

If you have life insurance coverage equal to 10-12 times your annual income it replaces your income 10-12 times over for your loved ones if you die. It covers the bills, expenses and everything else essential for your dependents to get by on because you’re no longer there.  

Let’s pretend we have a friend named Alex. He’s a thirty-something office worker, earning $40,000 a year. He’s married to Sara, and they have two young children. Sara is a stay-at-home mom. This is what Alex and Sara are thinking about when it comes to life insurance. . .   

Income

Take your annual salary before tax and multiply by at least 10. If you’re in a job where you expect your salary to rise in the next 5-10 years, then use that figure when you’re making your calculations. In Alex’s case, he gets $40,000 a year before tax. That gives him $400,000 in “death benefit” if he dies. (Death benefit is another way of saying payout.) 

Stay-at-home parent

The stay-at-home parent in your life may not be working outside the home, but they are providing a valuable service for the family. Let’s look at Sara. She is a stay-at-home-mom. That means she’s caring for the children, handling the household, being the kids’ Uber driver and everything in between. For “free”! Sara should get her own term life policy, for coverage between $250,000-$400,000 to cover those jobs.   

Dependents

If you have children, then they are dependent on your salary to provide for them. Alex and Sara’s children are aged 6 and 3. That means they’ll be relying on their parents for 15-20 years. And it’s not just the school and college fees, but things like medical bills and extracurricular activities too. That’s when the coverage of 10-12 times your annual income gives your children a secure future until they’re able to support themselves. 

Funeral costs

Some people who might not have enough in the bank will use life insurance to pay for their funeral. The average cost of a funeral these days is a whopping $8,500⁽¹⁾. Here’s another way of paying for your funeral; set aside $50 a month, invest it somewhere (like in a good mutual fund) and your money could grow into more than enough to cover your funeral expenses.  

What Kind Of Insurance Should I Get?

The type of life insurance we always recommend is term life insurance. Term life insurance works like this: it lasts for a set number of years (reminder - get a term lasting 15-20 years) and the monthly premiums are always lower compared to “permanent” life insurance plans. 

How Much Will It Cost?

The cost of life insurance is determined by age, health and lifestyle. Alex is in good shape and wants a 20-year term life insurance plan, giving him a death benefit of $400,000. How much will he pay? Around $18 a month - less than what he spends on coffee every month! 

Dave recommends term life insurance because it’s affordable; you can get 10-12 times your income in your payout, and you can choose a length of term to cover those years of your life where your loved ones are dependent on that income. 

The Next Step Towards The Best Insurance For You

Like Alex and Sara, if you have the right tools you can work out how much life insurance you and your family need. This is the important first step in thinking about life insurance and the protection and peace of mind it can give you. 

We believe a term life insurance plan makes the most sense for everyone. And if you’re in the market for new life insurance or want an expert to talk to, we recommend RamseyTrusted provider Zander Insurance. They’ve been helping people find the best term life plan for decades. Don’t let another day go by without being protected. Start here to get your term life insurance quotes.