Life insurance is important—and worth having before you really need it. But even if you’re nodding in agreement, you still might wonder, How much life insurance do I need?
The sweet and simple answer is 10–12 times your annual income. Why 10–12 times? Because if you die, that amount replaces your salary and gives your family a comfortable financial cushion while they recover from their loss. It also gives them money they can invest for future income. Buying 10–12 times coverage guarantees that whatever else your family feels, they won’t feel a financial pinch when you’re gone.
Let’s look at exactly 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: you need 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.
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We all know a death in the family is a big blow, and real life is about more than just numbers. You don’t want your family to worry about financial issues while they’re going through such a hard time. That’s what having life insurance is all about.
When you set your death benefit (which is another way of saying payout) at 10–12 times your income, you’re making sure you’re replacing your salary and then some. It sounds like a lot. But that much term life insurance is actually pretty inexpensive for most people. Plus, you’re not just looking to take care of your family’s immediate needs—you want to make sure their future needs are covered too.
The reason we say you need a policy for 15–20 years is simple too: 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 years in between—when they’re totally dependent on you.
If you’re following our Baby Steps, you’ll be busy building an emergency fund and investing your money in mutual funds during those 15–20 years. 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?
It may sound morbid, but life insurance covers one thing: your death. (Technically, it should be called death insurance—but who would buy that?) The sole job of term life insurance is to provide a death benefit to your beneficiaries (your family) if you die during the policy term.
Like we said above, it covers the bills, expenses, and everything else essential for your dependents to get by on if you’re no longer there. And when you buy a policy worth 10–12 times your income, your family can invest the money from your life insurance in good, growth stock mutual funds and use the growth of those investments to replace your income for years to come.
Let’s pretend we have a friend named Alex. He’s a thirtysomething 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 . . .
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 earns $40,000 a year before tax. That means he needs a term life insurance policy with at least $400,000 in death benefit if he dies.
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.
If you have children, they’re dependent on your salary to provide for them. Alex and Sara’s children are 3 and 6. 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.
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 $7,848.1 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 or whole 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 with 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.
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The Next Step Toward 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. The first important 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.