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What is the best way to determine how much life insurance I need?

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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!" :-)

  • +1 almost exactly what I'd have said. I'd consider upping the insurance once you have kids to be sufficient to pay off a chunk of the mortgage, so your partner can have the option to cut back on work if needed – Rich Seller Dec 22 '09 at 20:38
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    Term life insurance is relatively cheap. I can get a $1 million 20 year policy for $600 a year, which should be able to pay off any house that you can prudently mortgage. (I can restart the term in a decade and it will be even cheaper) – SpecKK Aug 11 '10 at 16:23
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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.

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    I wonder what interest rates were like when that advice was originally formulated. Any idea how old that advice is? – Chris W. Rea Aug 9 '10 at 21:10
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    @Chris W. Rea: I think this is based on the S&P500 returns (10.5% average). Dave Ramsey is still holding to that advice. – Alex B Aug 9 '10 at 21:50
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    @ alex b The common advice is that one can withdraw about 4% of retirement funds each year to have a low risk of runout. This would be 25x income. 8-10 may be ok if it's intended to bridge a gap, say to get the kids through school, for example, but not as a permanent solution for a non working spouse. Sometimes simple is too simple, and Dave assumes a 12% long term return. I'd respectfully ask his followers of the last 12 years "how's that working out?" – JoeTaxpayer Aug 23 '11 at 2:15
  • @JoeTaxpayer well salary is taxable and life insurance proceeds are not. Also the 4% rule of thumb is for financing retirements lasting 30 years using market investments with a minimum success rate of 95% or so; it doesn't apply to financing the raising of a family over 22 years or less with a low risk product like insurance. – stannius Mar 14 at 16:20
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    To put it simply - Dave has done far, far, more good than harm. I object to his S&P return inflation and high retirement withdrawal suggestion. It's dangerous. I object to his "my way or highway" attitude. You like the snowball method? Ok. But be aware of the extra cost compared to paying high interest cards first. You think credit cards are evil? Ok. But I have documented $60K+ of card rewards (which will pay for 2 yrs of kid's college), and lived on a budget I stick to. And retired at 50. And Dave blocked me on Twitter. Really. – JoeTaxpayer Mar 19 at 20:24
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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.

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    Be very wary of advice from insurance agents, and get at least 3 opinions. Don't be afraid to do the math yourself to make sure you aren't getting fleeced on commissions. i.e. 20-30 year Term Life insurance along with a sound financial plan is usually the best deal. – SpecKK Aug 9 '10 at 23:26
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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.

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protected by Chris W. Rea Jun 16 '12 at 1:57

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