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Home » Life Insurance

How Much Life Insurance Should you Buy?

Last updated by on 16 Comments

Life insurance is an interesting topic.

It involves a ton of guess-work and assumptions about your career.

It taps in to our fears around losing a loved one.

It’s often misrepresented as to what it is supposed to do.

Some view it as a potential lottery ticket.

And there’s always the random occasional story about how some crazy poisoned their spouse or faked their death (shout out to Fletch) in order to cash out on their policy.

… who said personal finance is boring?

So how much life insurance do you need?

What the Experts Say

how much life insurance do you needI commonly hear finance gurus and professionals recommend some multiple of your salary.

Often times, it’s 10X – 12X. For example, Dave Ramsey says your life insurance policy should replace 10X your annual income.

While that equation is simple and easy to know what your income is – just pull out a calculator and hit the multiplication button – I think it over-simplifies things way too much. I’ll explain further in a bit.

Who Doesn’t Need Life Insurance?

First, let’s cross some of you off the list. There are those that do not need life insurance at all.

When I talk about who doesn’t need life insurance, I’m speaking of the insured being the person that were to die – vs. benefactors.

I don’t think the following folks need a life insurance policy:

  • Anyone age 0 – 18: Nobody reliant on your income? No need for life insurance.
  • Those with no present and future income: Generally, if you don’t have income, there is no income to replace in your absence (which is the whole point of life insurance).
  • Those with zero dependents: If nobody is reliant on your income, you really don’t need life insurance.
  • Those who are financially independent: If you are living solely off of investment income and no longer working, you have to assume that others will be able to live off of that same investment income. If they can’t? Their problem, not yours.

Who Does Need Life Insurance?

If anyone is dependent on your income to maintain their quality of life for the foreseeable future, you should have a life insurance policy.

A dependent could include a spouse, children, elderly parent, a relative with special needs, etc. It doesn’t really matter, as long as that person/people are dependent on your income.

Life Insurance and Debts

What about debts being passed on to others?

In general, when a person dies, their estate becomes responsible for any debts the person owed. The person’s executor or personal representative is responsible for paying those debts out of the property of the estate.

The executor is not liable for the debts, however, and does not have to pay them outside of the assets of the estate.

The exception would be if you had a co-signer on a loan or joint account holder. In that case, the burden would be shifted to the co-signer. If that person is not reliable on your income, this may be another example of when you would want a life insurance policy, so that person does not have to shoulder 100% of the burden of the debt. If the assets you co-own exceed the debt, it’s not an issue.

For all Others, how Much Life Insurance Should you Buy?

Over the years, I’ve come to a different conclusion from my original view on how much life insurance you need. Today, I believe that there is no one-size fits all formula. There are so many variables that should go in to life insurance calculations:

  • savings level
  • your age
  • if you have a policy at your place of employment
  • years of income lost
  • expenses of dependents
  • education of dependents
  • income of dependents
  • age of dependents
  • asset level for you and your dependents
  • debt levels for you and your dependents

Throwing out a random X times income variable is definitive and easy, but it doesn’t really do you any justice, and the end result is that you’re probably over-paying for your insurance policy.

However, I do have 10 rules to follow, and they should be a good guide for your own personal math:

  1. The true purpose of life insurance is to prevent financial hardship and a decline of quality of your dependent’s lives without your income. Nothing more. Nothing less.
  2. If you’re treating life insurance as a lottery ticket for others, the odds are not in your favor. Insurance companies have their math down to a profitable science, and those insured end up paying in more than they take out, on the whole.
  3. Expenses of your dependents in your absence are equally, if not more important, than your income. They should be factored in to any life insurance calculation. Nobody talks about this!
  4. Don’t forget health insurance costs! If a dependent relies on your health insurance, that is going to be a significant cost burden for them to pick up.
  5. If your dependents (namely, your significant other) have earning potential that meets their needs, you may not need life insurance at all. Their life will continue on, their income may increase, and they may even meet another whom they could team up with financially. For this reason, you probably need less life insurance than you think.
  6. Do not listen to the recommendations of anyone who actually sells the policies. They are going to suggest more life insurance than you actually need.
  7. If you have a hateful or borderline psychotic dependent, no life insurance policy is probably your best bet, until you can flee. I say that only somewhat jokingly.
  8. Price compare: just like with any insurance policy, rates and terms differ by company. Some require physical exams, others do not.
  9. Term life insurance is the best because it is the cheapest and easiest to understand. Other forms of life insurance carry larger commission from sales reps and are over-complicated. If you want your life insurance to become a retirement plan, there are better means to do so.
  10. Fear usually leads to you buying more life insurance than you need. Take that in to consideration when calculating your final #.

Life Insurance Discussion:

  • How much, what term, and what cost is your life insurance policy?
  • How did you come to that calculation?
  • Have you decided to get rid of your life insurance policy or go without? Why?

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I am G.E. Miller, & this is my story. My goal is financial independence ASAP. If you share that goal, join me & 7,500+ others by getting FREE email updates. You'll also find every post by category & every post in order.


16 Comments »
  • cmc says:

    Since we are both fairly young, I have enough life insurance (as well as my retirement savings) to cover all of our student loans (about $200,000) plus enough to cover expenses and to minimize disruption to my wife’s life for about a year or two. She currently makes more than enough to take care of herself in the short term and if student loans were to disappear, a third of her income would return to her paycheck.

    Anything more would be a waste, but this obviously needs to be revisited when the loans are paid off or when we have kids.

  • Amanda M says:

    I’ve never paid for life insurance. I’ve got no husband, no kids to support, and a savings cushion along with a 1X plan provided by my employer. My benificiaries (my brother’s kids and a friend’s kids) will have a nice little college fund if anything happens.

  • Chelsea says:

    Okay, I understand the thinking in saying that people with no dependents don’t need life insurance, but what about funeral costs? Burial, funeral, etc. – even a barebones one with a cheap casket and headstone run at least $10,000. My family doesn’t have that kind of money just lying around, so I have life insurance despite the fact that I have no debt and no dependents.

    • G.E. Miller says:

      If you are young and have no estate to transfer and no employer life insurance to cover you, perhaps you could buy a small $10k term policy. If you’re elder, you’re prob. better off saving up a small fund instead.

      If your survivors have to cremate and hold an inexpensive funeral in their back yard, I promise you won’t notice the difference. Maybe put in your will, “Hey, if I die with no money to my name, keep it super cheap, please.” to ease their guilt. =)

      • In the biz says:

        Why would I as an elder try and scrap up thousands of dollars to pay for my funeral when a $10k policy is virtually pennies? As someone probably just trying to get by covering other medical expenses, I want my cash outlay while alive to be as little as possible.

        For younger folks, many employers are willing to cover some of the costs of such low coverage. There’s no way I’m going to bother saving even $5 grand for a rainy day funeral fund when it costs me less than a dollar a month to cover each of my children ($10k each).

        A little insensitive on the backyard burial, but I agree that it shouldn’t be on close family/friends to pay for one’s funeral. My take on covering funeral expenses – buy a small policy if you can afford it and don’t think you could save that amount on your own.

      • In the biz 2 says:

        I also have to add, for claiming current rules of thumb are over-simplistic, so is this post.

        Insurance is a product sold just like everything else. A good (and honest) insurance rep will listen to your needs and bring things to light that one may have not thought otherwise. In a country where many people by more car than they can afford, more home than they can afford – many times because of their personal American dream (and I’m no one to judge) and a nudge from the eager salesman, insurance shouldn’t be viewed any different than these products. So if there’s someone telling you to think of this or consider that, it’s not like they’re saying “even though you want a minivan, you should really consider a Ferrari,” generally they’re trying to offer options. Unless the insurance salesman blurts out an arbitrary number and says, “This is what we see most people doing” (like the 10x income) with no real basis, then I take issue with #6, everybody is different.

        Buying insurance is more than asking oneself how much my dependants would need, it also begs the question of what would my dependants do at my death? Move closer to family? Travel and take time off? Does a spouse need to go back to school?

        Personally, my wife stays at home to care for our 2 children. I know the cost of child care in my area and want to feel comfortable that insurance will cover that for 5 years. That way, I’m not taking income out for something I currently don’t pay for. Lastly, an extra $25k or $50k in coverage to maybe travel and see family or bond after a loss and take a trip somehwere is nominal in return for that sort of opportunity. Of course, to each is own.

  • Trevor says:

    When my wife and I purchased term policies a couple of years ago I calculated our debts plus two years of my wages to get to an amount for my policy. Her policy was calculated at just our debts. It actually came out to a much lower number than I was originally told I needed. This in turn saved me from over purchasing on our policies. We re-evaluate our policies annually to make sure they are still in-line with those calculations.

  • Mandy says:

    Even if you don’t earn much and your family isn’t “dependent” on your income, you need to look at what financial hardships might come from your loss. For instance, I work part time weekend hours and stay home with my children during the week. Sure my family could probably survive without my couple hundred dollars a month BUT unexpectedly having to pay childcare expenses for our children would create a financial hardship for sure. So you have to look at the numbers before and after. Not just what you bring in but what might have to go out as well.

  • Natalie H says:

    I probably have more life insurance than I absolutely need, but I put a lot of thought into what I wanted to get. I have a term policy for myself and my husband. My husband’s policy is $750k and mine is $300k. My husband is the sole income earner and I’m currently a SAHM with a two year old. I have some medical issues that make it difficult for me to work more than a part time job. If something were to happen to my husband, money trouble is the last thing I want to think about. I want to know that I can continue raising my son full time and not be dependent on anyone. If I were to die, he would have full time child care costs and possibly other things, that would be very difficult to pay on his income. We get a discount from his group employer policy, so we pay about $40 a month for both policies. I don’t want to find out later that I didn’t get enough coverage to save a couple of bucks a month, so I’m over insured. However, I plan to gradually reduce the numbers as my son gets older and we have more savings.

  • Holly Thrifty says:

    Life insurance is more than about money. We have no kids, no debt but we both have term life insurance. If you’ve ever watched a younger person lose a spouse, it takes nearly a year until they can figure out a plan for the next phase of their life. So, we have insurance to cover each of our salaries for 2 years so nobody has to make major life decisions in the midst of grief.

    So, the survivor’s life can stay on autopilot and the bills will get paid while he figures out his next move. Of course, that will still allow him to save the same amount of money we save now–or more, but there’s no pressure to make a hasty decision.

    And, thankfully we bought term life when we were younger and got great rates.

  • Ron Ablang says:

    Hmmm. We are probably overpaying for life insurance. At work, I have 3x my salary for about $26 a month. Outside of work, we each have quarter-million dollar policies at about $100 a month (total). We only owe about $99k left on our home.

    • Natalie H says:

      It depends on your age and if you have level term costs or not. It doesn’t hurt to shop around though. I get a great rate because we are 30ish and renew annually. The rate and terms could change at any time. And the cost will increase substantially as we age. However, I hope to not need significant amounts of life insurance in 15-20 years.

  • Mike says:

    I somewhat agree and disagree with “x times salary” model. Simple iis good because it allows people to get started without the analysis paralysis. And since you basically imply that salespeople cant be trusted i guess they will have to trust a black box calculator they found on the web.

    Ive sold term policies with the simple approach as well as detailed. In all reality though, overinsuring a little isnt the worst case scenario with term insurance being so cheap.

  • Cheapest (term life)is not always the best option.

    Many twenty something couples with young children find universal life a better way to fund future college expenses. The cash value can finance tuition while the parent controls the money (529 plans belong to the children upon age of majority). If the primary breadwinner dies then college costs are covered.

  • Rosa Herrera says:

    Life insurance is an essential security to have at any stage in one’s life. Whether you are young and single, or older with a family, life insurance is a very important service to invest in. There are options for just about every life style out there if you do a bit of browsing around!

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