What is the best way to determine how much life insurance I need?
If I remember the information in "The Wealthy Barber" correctly, he said:
- Before you're married, you need almost none.
- When you're married, but before kids, if both people are employed you need almost none. In the case where one person is still going to school, make sure you get enough on the working person so the other person could finish their degree.
- Once you have kids, you need a lot more. You want to make sure that the other person doesn't have to sell the house. You also want enough capital that it essentially replaces your income for the next 20 years. That way it's enough to get the kids out the door without compromising the way you live now.
- After that, you probably have some retirement savings anyway. Just get enough that the house will be paid off and the other person can live comfortably.
And as someone once said to me, "make sure you're worth more alive than dead!" :-)
After some thought, I follow Dave Ramsey's advice because it's simple and I can do the math in my head - no online calculator needed. :)
You need Life Insurance if someone depends on your income. You can replace your income with a single lump sum of 8-10 times your current income where those who need your income, can get roughly your salary each year from the life insurance proceeds.
Life Insurance can be a difficult decision. We have to first assess the "want" for it vs. the "need" for it, and that differs from person to person. Any Life licensed agent should be happy to do this calculation for you at no cost and no obligation. Just be sure you are well educated in the subject to make sure they are looking after YOUR needs and not their wallets. For the majority of clients, when looking at "needs" we will be sure to look at income coverage (less what the household needs with one less body) as well as debt coverage, education costs etc. More importantly make sure you are buying the RIGHT insurance, as much as the right amount.
One simple calculation to determine your life insurance need: D.I.M.E. method
D: Debt All your car loan balances, credit card balances, student loans, business loans, etc.
I: Income Your annual income times 10 (for 10 years of income replacement).
M: Mortgage Your home mortgage balance.
E: Education Your children's education expenses.
You add up all these items, and you'll come up with a proper amount of life insurance coverage. This should be sufficient model for a majority of people.
Yes, your life insurance needs will change as you move through life. Therefore you should sit down with your life insurance agent to review your policy every year and adjust it accordingly.