How Much Life Insurance Do You Actually Need?
How much life insurance a person needs is somewhat subjective. Some stick to the $250,000 or $500,000 policy benchmark. Others apply the 5 to 10 times your salary rule of thumb. Both of which aren’t necessarily wrong, but could also be way off the logical mark.
So what do you before you jump to a number? Try this three-step process:
#1 Income Replacement
Guesstimate your family’s current living expenses minus those expenses attributable to you. Then multiply it by the number of years until your youngest reaches age 18, 21, 25, or whatever age you hope your kids will be financially independent by.
#2 Debts & Funeral Expenses
If you have outstanding student loans, car loans, business loans, etc., then add it to your running total. Some people prefer to add their mortgage on top of it. Others feel that including the mortgage payments in step #1 is sufficient. In terms of funeral expenses, $10,000 to $15,000 is the typical range.
#3 One-Time Expenses
This is the extras. Weddings, new cars, and home improvements might be on the list. The other big one is education expenses – i.e. whether you’d want to increase your policy to pay for your kids’ college tuition, books, room and board, and so on (which at today’s costs could double the policy amount you’ll need).
Add up #1, #2, and #3, and there you go – you should now have a much better idea of how much life insurance you need.
To learn more about investing, retirement planning, or wealth management in general, check out our website at PerennialTrust.com