How much life insurance do I need rule of thumb
There are a few rule of thumbs for the amount of life insurance you need.
They will give a general idea of the smallest and largest amounts of life insurance your family needs.
For a more in-depth way to decide your life insurance needs check out my article:
How much life insurance do I need?
The best rule of thumb depends on your current situation and what you want to provide for your family.
Minimum rule of thumb
If you want to just provide for your families immediate expenses and debts.
Just add up your debts – car loan, credit cards, student loans, mortgage, etc…
add enough for your final expenses and that is the total you need.
Final expenses average $7,000-$10,000 for burial and $3,000-$5,000 for cremation in today’s dollars.
How much will burial be in 20 years?($13,300-$19,000), in 30 years?($18,350-$26,250), at 3.22% (100 year average) inflation rate.
This is a good rule of thumb to give you an idea of the smallest coverage you should have.
It is also useful if you are retired or single and have no dependents to give you the total coverage you may need.
Time to recover rule of thumb
Multiply your yearly income by 7 to 10 to get the coverage you need.
This will cover your final expenses, debts and replace your income for about 5-10 years.
Allowing your family some breathing room and time to recover financially after you pass.
Working Income replacement rule of thumb
Multiply your yearly income by 17 for your amount of coverage.
This will cover your final expenses, debts and replace your income for about 15-20 years.
Allowing your family not only time to breathe but complete financial goals like college education.
This will cover most families financially until your spouse is ready to retire.
Guaranteed income replacement rule of thumb
Multiply your yearly income by 25 for your insurance needs.
This will replace your income effectively forever.
Using a standard 4% withdrawal rate your family would be able to get your yearly salary without ever running out of money.
This is the very largest amount you should buy to replace your income.
- Base all your calculations on your expenses instead of income. You may make $60000/yr but only spend $50,000/yr. You also have personal expenses so you can subtract them too. Say you spend $10,000/yr on work related expenses your family will not be spending that after you are gone so they don’t need that money replaced.
- Take your other savings and investments into consideration. If you figure that you need $500,000 to replace your income but already have $300,000 in the bank, you only need $200,000 in life insurance coverage.
- If you are single or retired, you don’t have to worry about replacing your income so just get enough insurance to cover your debts and final expenses. I recommend getting permanent insurance such as whole life for this amount as you have these insurance needs through out your entire life.
- For a family just starting out, near retirement or on a tight budget i would use the 7-10 times your annual expenses rule to get your coverage amount. I would suggest a small whole life policy for each parent ($25-$50,000) and then term life insurance for the rest. This will give you good coverage without breaking the bank.
- For families with the ability 17 times your annual expenses will great protection, replacing your income for most of your working years. Again a mix of whole and term life is my suggestion. You can also start looking at some advanced insurance strategies.
- In my opinion the 25 times your yearly salary rule of thumb is usually overkill and you will be paying for more than you need. You usually would be better served putting the extra money toward retirement savings.
- Look at your budget if you can only afford the minimum, get it. Life insurance costs are mainly based upon your age and will be more expensive next year. If you can afford more go for the 7-10 times rule, and so on.
- Take a look at your life insurance needs each year, or every few years. If the kids are gone, or if you have saved up half of your retirement nest egg, you won’t need as much insurance. Don’t pay for something you don’t need.
Don’t just take my word for it.
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