Life insurance is an essential safety net that you should have before you find yourself in desperate need of it. But even if you understand its importance, you might still be wondering, “How much life insurance do I actually need?”
Well, the simple answer is that you should have coverage equal to around 10 to 12 times your annual income. Why this range? Because if the unexpected happens and you pass away, this amount will replace your salary and give your family a comfortable financial cushion while they recover from their loss. It will also provide them with funds that they can invest for future income. By obtaining coverage that is 10 to 12 times your income, you ensure that your family won’t experience any financial strain during such a difficult time.
Let’s dive deeper and explore how you can calculate your own magic number. And remember, you are worth more than you realize!
Calculating Your Ideal Coverage Amount
To cut straight to the chase, you should aim for coverage that is 10 to 12 times your annual income. This coverage should be in the form of a level term life policy that lasts for 15 to 20 years.
We all know that the death of a loved one is a devastating blow, and real life goes beyond mere numbers. You don’t want your family to worry about financial issues while they are already dealing with such a challenging time. That’s where life insurance comes in — it provides peace of mind in uncertain times.
When you set your death benefit (the payment your beneficiaries receive) at 10 to 12 times your income, you ensure that your salary is fully replaced and then some. It might sound like a lot, but term life insurance is actually quite affordable for most people. Additionally, it not only addresses your family’s immediate needs, but also secures their future requirements.
The reason we suggest a 15 to 20 year policy is simple: if you have young children, by the time the policy ends, they will have finished college and become self-sufficient. During those intervening years, they are entirely dependent on you, so having coverage is crucial.
If you follow our small steps, such as building an emergency fund and investing in mutual funds over those 15 to 20 years, you will reach a point where you become “self-insured” and no longer require life insurance.
Understanding What Life Insurance Covers
It might sound morbid, but life insurance only covers one thing: death. (Technically, it should be called “death insurance,” but that doesn’t have quite the same appeal, does it?) The sole objective of term life insurance is to provide a death benefit to your beneficiaries, i.e., your family, if you pass away during the policy’s term.
As we mentioned earlier, this coverage is meant to cover essential expenses and bills for your dependents to survive once you’re no longer there. By investing the life insurance money in growth stock mutual funds, your family can rely on the growth of those investments to replace your income for years to come.
Let’s take a hypothetical example. Imagine we have a friend named Alex — a thirty-something office worker earning $40,000 a year. He is married to Sara, and they have two young children. Here’s what Alex and Sara are considering when it comes to life insurance…
To calculate your coverage, take your annual salary before taxes and multiply it by at least 10. If you anticipate that your salary will increase in the next 5 to 10 years, use that figure in your calculations. In Alex’s case, he earns $40,000 a year before taxes. This means he needs a term life insurance policy with a minimum $400,000 death benefit.
The role of a stay-at-home parent might not involve receiving a paycheck, but it is invaluable in supporting the family. Let’s consider Sara, who is a housewife. She takes care of the kids, manages the household, plays chauffeur, and handles everything in between. Her contributions are priceless! Therefore, Sara should have her own term life policy with coverage ranging from $250,000 to $400,000, ensuring that these responsibilities are accounted for.
If you have children, they rely on your income to support them. In Alex and Sara’s case, their children are 3 and 6 years old, meaning they will be dependent on their parents for the next 15 to 20 years. The coverage of 10 to 12 times their annual income secures a stable future for their children until they can support themselves. It’s not just about school and college fees, but also medical bills and extracurricular activities.
Some individuals who don’t have significant savings might turn to life insurance to cover their funeral costs. The average funeral expenses today amount to approximately $7,848.1 Alternatively, you can set aside $50 a month, invest it wisely (such as in a good mutual fund), and watch your funds grow to more than enough to cover your funeral expenses.
Choosing the Right Type of Insurance
When it comes to life insurance, we always recommend term life insurance. Here’s how it works: you obtain coverage for a specific duration (remember to select a 15-20 year term), and the monthly premiums are significantly lower compared to whole or permanent life insurance plans.
Understanding the Costs
The cost of life insurance is determined by factors such as age, health, and lifestyle. In Alex’s case, since he is in good health and wants a 20-year term life insurance plan with a $400,000 death benefit, he would only need to pay around $18 a month. That’s less than what most people spend on coffee each month!
Dave Ramsey highly recommends term life insurance because it is affordable. It allows you to obtain coverage that is 10 to 12 times your income while also selecting a term length that aligns with the years when your loved ones rely on your income.
Taking the Next Step
Just like Alex and Sara, you can calculate the amount of life insurance you and your family need if you have the right tools. This is an important first step in contemplating life insurance and the protection and peace of mind it can provide.
We believe that a term life insurance plan makes the most sense for everyone. If you’re in the market for new life insurance or want to consult with an expert, we recommend Zander Insurance from trusted provider Ramsey, who has been helping people find the best term life plans for decades. Don’t let another day pass without ensuring you and your loved ones are protected. Start by obtaining your term life insurance quotes here.