If you’re in the market for a life insurance policy, you have probably heard that you should purchase a policy that is approximately 10 times your annual salary. While many life insurance agents and financial planners use this general rule of thumb, it is important to note that everyone’s need for life insurance is different.
How do you determine if you really need 10x your salary in life insurance?
Your life insurance policy, or policies, should be tailored appropriately to your family or business needs. Life insurance is a tool that gives your dependents financial protection in the case that you pass away and are no longer able to provide for them.
In this article, we’ll provide some insider’s tips to help you choose the right amount of coverage for your needs.
Quick Article Guide:
The amount of life insurance you need depends on your unique family situation. Most of our clients purchase life insurance on the family’s primary breadwinner to provide income replacement for their family. To determine the amount of coverage needed to replace your income, determine your yearly take-home pay, after taxes, and divide this number by 12. This will calculate your monthly take-home income.
To Determine Your Monthly Take-Home Pay:
Let’s say your current yearly pay is $60,000 after taxes
Divide $60,000 (yearly pay) by 12 (number of months in the year)
Your monthly take-home pay = $5,000
After you determine your monthly take-home income, subtract any bills that will cease to exist if you were to pass away.
Examples of these bills might include:
- Health insurance premiums
- Dental insurance premiums
- Gym memberships
- Cost of gas / public transportation
Once you subtract these bills from your take-home income, you’ll have an approximation of each month’s total expenses, or the amount of money that you need to replace each month for your family.
Calculating the Amount of Income You Need to Replace Each Month:
Take-home income = $5,000 per month
(Subtract all individual expenses)
- Health and Dental Insurance: ($200 per month)
- Public Transportation cost to and from work: ($300 per month)
- Gym Membership ($40 per month)
- Chiropractor Bills ($100 per month)
- Coffee and Lunch ($500 per month)
Amount of replacement income needed each month = $3,860.00
Now that you have an idea of how much money you need to replace for your family each month, multiply this number by 12.
This final number will provide you with the amount of income your family will need each year to continue their current lifestyle.
Calculating the Annual Income Your Family Needs:
Annual Replacement Income Needed = $3,860 (monthly income needed) x 12 (months in the year) = $46,320
Once you have an approximation of the amount of income you will need to replace for your family each year, multiply this number by the number of years you anticipate your income needing to be replaced.
If you are uncertain on how to determine the amount of time needed for income replacement, estimate the number of years you or your spouse have until retirement age.
Calculating the Amount of Coverage You Need:
Your Current Age = 43
Planned Retirement Age = 62
Number of Years until Retirement = 19 (current age – planned retirement age)
19 (years) x $46,320 (annual replacement income needed) = $880,080
In this example we would recommend purchasing a 20-year term for $880,000 of coverage.
How Much Will My Insurance Cost Me Each Month?
Let’s use the example from above, and assume our applicant is in excellent health…
Actual Cost for a 20-year, $880,000 Level Term Life Insurance Policy (Ages 35-55):
|Age||Monthly Cost of Coverage (Male)||Monthly Cost of Coverage (Female)|
*Monthly rates are accurate as of 05/15/2017 and are provided for illustrative purposes only.
If you would like actual rates based on your age and coverage needs, please feel free to give us a call toll-free at: 855-902-6494.
If you and your spouse both work, we recommend using the same formula above, but for each of your own incomes and expenses. These numbers are not exact and do not account for the possibility of you or your spouse being able to increase your earnings in the future. If you were to pass away, your spouse may be able to furthering their education, or land a better job.
On the other hand, these equations also fail to account for inflation or any unexpected expenses that may occur. It’s impossible to determine exactly how much coverage you will need in the future, but most financial experts will tell you to buy no less than $880,000 of coverage in this situation to cover your anticipated expenses. The idea is to provide your family with the money they would need to continue your current lifestyle until your spouse is able to retire, or until your children have completed college and moved out.
Remember, everyone has different life insurance needs and there is not a “one size fits all” life insurance policy. One of the most common reasons that our clients choose to purchase an insurance policy is to secure the cost of their children’s college education.
As of 2017, the cost of college tuition averaged between $9,650 and $33,480 per year. This estimate does not include room and board, only the cost of tuition. If you want to make sure your children have the opportunity to go to college, you will want to account for these expenses when you purchase your policy, especially if your children are looking into careers that require a master’s degree, law degree, or doctorate.
When selecting the term for your life insurance, make sure you purchase a term life insurance policy that lasts long enough to provide coverage until your youngest child graduates from college. For example, if you have two children and your youngest is five years old, you will want to purchase a policy with a minimum of a 20-year term to insure your youngest is covered until the age of 25.
Another very popular reason people buy life insurance is to protect a mortgage. Life insurance for mortgage protection can be as simple as purchasing a term policy that is large enough to pay off your house, and extends for the same amount of years as your mortgage. For example, if the mortgage on your home is a 25-year loan for $325,000, you should buy a 25-year term policy with a face amount of $325,000.
You should purchase a policy for the exact amount of your mortgage only if your spouse’s income would be able to cover the household expenses without a mortgage. This is an ideal situation, but most of our clients choose to purchase a policy that also provides additional coverage for extra expenses. If you have more than one life event, like a mortgage and college expenses for your children, you will want to purchase a term policy that extends past both of the life events with a large enough death benefit to pay for both events.
If you have children, you probably already know that your “stay-at-home” spouse’s job is harder than yours. A false assumption about life insurance is that stay at home parents do not need a life insurance policy. While your spouse may not bring home a paycheck, their “jobs” do not go without value.
As of 2016, the average monthly cost of childcare exceeds $800 per month, and this figure does not include transportation to and from school each day, cleaning the house, cooking, and doing laundry. If you are the sole provider for your family, these responsibilities may seem impossible, especially if you are working full-time.
To avoid this scenario, most financial planners and insurance agents recommend purchasing a policy on the “work-at-home” parent in order to cover any expenses that would accrue if they were to pass away. Depending on the ages of your children and how many kids you have, most financial experts will recommend purchasing a life insurance policy on your work-at-home spouse that provides approximately 50% of the death benefit that your income earning spouse’s policy provides. Most life insurance companies will approve a policy of up to $1,000,000 of coverage for a work-at-home spouse, or equivalent coverage to the income earning spouse’s policy.
If you pass away, your family will be in mourning. By having a life insurance policy in place to cover your expenses, you can help alleviate any additional stress that may have come from financial struggles. Since needs vary from person to person, it is important for you to buy an affordable policy that fits your lifestyle. If you’re not sure how much life insurance you need, one of our agents will be happy to help you assess your expenses, or you can use our FREE life insurance calculator to help you determine correct amount of coverage.
Our agents at Term Life Advice have helped thousands of customers buy affordable life insurance policies to fit their exact needs. We work with over 60 different top-rated companies that specialize in insuring people of different ages and those that are considered to be a higher health risk. Give us a call today and we’ll impartially shop dozens of companies to find the best rates available to you. Our services are free, and there is no cost to apply for coverage. Toll-Free: (855) 902-6494
The truth is, some people do not need to buy life insurance. If you are close to retirement age, or if you have a large amount of money saved up, life insurance may not be critical. Additionally, if you have no dependents and no one is reliant on you for your income, you do not have to worry about providing a replacement income for your loved ones. However, even if you fall into the previous scenarios, you may not realize there are additional expenses that your family may run into when you pass away.
The most common and overlooked expense that your loved ones encounter after you pass away are funeral and burial costs. As of 2016, traditional funeral costs averaged $7,000 to $10,000. Bear in mind that this figure does not include the additional costs of the casket, a tombstone, a reception, and flowers. After all aspects of funeral planning are considered, the total cost to bury you may be closer to $15,000 or $20,000.
If you have a savings account set aside to cover these expenses (also known as being self-insured), or if you have already paid for your plot, you might not need life insurance. This may also be the case if you’re young and without dependents, unless you have any outstanding debts like car loans or student loans that your parents may have cosigned for you.
If you have outstanding debts or have not set aside money for your final expenses, you may want to consider buying life insurance. Whether you’re the breadwinner or you and your spouse have a double income, you should always consider your outstanding debt when you are determining your need for coverage.
Outstanding debts you’ll want to consider when determining your need for life insurance include: mortgages, credit cards, car loans, student loans, business loans, judgments, etc. It can be emotionally and financially taxing on your family members to figure out how to cover these expenses on a whim. If you have any outstanding debts, owning a small term policy to cover these outstanding expenses will prevent your family from being burdened if something were to happen to you unexpectedly.
Our expert agents have helped thousands of customers buy affordable life insurance policies to fit their exact needs. We work with over 60 different top-rated companies that specialize in insuring people of different ages and those that are considered to be a higher health risk.
Give us a call today and we’ll impartially shop dozens of companies to find the best rates available to you. Our services are free, and there is no cost to apply for coverage. Toll-Free: 855-902-6494 or you can request a free life insurance quote online below to instantly shop dozens of highly-rated insurance carriers.