Just like so many of the questions we receive, “how much life insurance should you have?” is hard to answer on it’s own.
The reason behind this is because there is really no great rule that applies to everybody about how much life insurance they should have. Sure, there are a couple guidelines to go by, but if anything in your life is even slightly out of the ordinary, you will find these rules being obsolete quite quickly.
Lots of people seem to be of the Dave Ramsey school of thought. Dave Ramsey says that your life insurance policy should cover 10 - 12 times your income.
We disagree with this entirely.
While it is perfectly possible for your needs to fall within that bracket of 10-12 times your income, chances are they won’t. Some people are obviously going to need more than that, while others will even need much less.
All sorts of things need to be factored in when trying to figure out how much life insurance you need. Things like debts, outstanding mortgages and loans all come into play. Even if your house is paid off, are you sure your family will want to stay in the same house they lived with you in, after you pass? Everyone’s family is different and some may require some money for a new house so they aren’t constantly reminded of your passing.
If you still have children, you will also need to factor in costs for college and anything else you will want them to be covered for after your passing. If your spouse doesn’t work, you will also need additional coverage to take care of those costs.
In short, Dave Ramsey’s advice is not solid enough to be followed exactly.
Are there any other ways to tell how much life insurance you should have as a rule of thumb?
Knowing that you shouldn’t follow Dave Ramsey’s method, you might still be looking for some sort of simple system to tell you how much life insurance you need. There is another rule of thumb, known as the rule of 4% that is a bit more reliable than Dave Ramsey’s method, but is still not 100% reliable.
The rule of 4% means that your family will live off of the interest of your payout, assuming that the lump sum earns 4% per year. So for example, if you earn $45,000 per year, you would need $1.125 million in life insurance to still be able to provide the same amount for your family.
The tricky part is predicting how much your family will receive. With market conditions and inflation, your family could easily receive far more or far less than the projected $45,000 per year. Some people are willing to live with that fact, while others can’t justify paying for life insurance if there is no guarantee it will actually cover everything. Those people tend to do their research more closely and figure out exactly how much life insurance they will need.
So what is the best way to figure out how much life insurance you need?
If you’re with us this far, then you probably realize there are no hard and fast solutions to figuring out how much life insurance you will need. Instead, you need to do some very exact calculation to make sure you aren’t under-covered, or paying too much for insurance you don’t need.
If you're over 60, you may need burial insurance coverage and only need $10,000. Others over 60 may have people dependent on their income and need more coverage. It really depends.
The best way is to make use of a life insurance calculator, that takes away the hassle of doing the math yourself, and lets you focus on answering the important questions.
We even use this tool ourselves, when customers ask us how much life insurance we think they need. It’s just that comprehensive and tells you exactly how large of a plan you will need to cover yourself and your family in case of your untimely passing.
Your life isn’t a guessing game - get it right the first time around
You don’t want to leave your family high and dry by not purchasing an adequate amount of life insurance coverage.
The calculator tool is incredibly easy to use, but if you are still having any trouble, we would be more than happy to assist you with figuring out just how much life insurance you need.