How Much Life Insurance Do You Need?
Determining the Amounf of Life Insurance Needed
Option 1: Multiply your salary by ten
This is an imperfect science, but it works. The “10 times salary” rule doesn’t take a detailed look at your family’s needs, nor does it take into account your savings or existing life insurance policies. And it doesn’t account for stay-at-home parents. Typically, both parents should purchase life insurance. If both parents make $100,000 each, purchasing $2 million might make sense.
Option 2: Purchase ten times your salary, plus $150,000 per child for college expenses
Education expenses are a critical piece of your life insurance calculation, especially if you have kids. This methodology accounts for 10 times your income, but also includes funds for college, even if university education seems in the distant future.
Option 3: Debt + Income + Mortgage + Education
This equation encourages consumers to take a more detailed look at your finances. Your debt and final expenses include debts, other than your mortgage, plus an estimate of your funeral expenses. Income accounts your annual income plus the number of years that your family would need support. Mortgage includes your mortgage obligation, while education includes the cost associated with sending kids to college.
How to Determine the Best Amount of Life Insurance for You
The general philosophy is to calculate your total obligations and then subtract your liquid assets. While it is very challenging to calculate exactly how much either of these will increase or change, a level of cushion will ensure that your loved ones can maintain their lifestyle should an unexpected event occur.