Lauren Cobello » Budgeting » Budget Tips and Tricks » How much Life Insurance do I need?
Discussions about life insurance can be tricky… maybe that’s why so many Americans put it off. You may have asked yourself or your spouse, “how much life insurance do I need?” And then never really looked into it long enough to determine a real and researched answer. As a result, as a nation we are woefully underinsured. In fact, although 85% of Americans understand the importance of life insurance, just 44% of American households have it. And of those 44%, 40% know that they don’t have enough.
I get it. Insurance can be complicated. Not only that, it forces you to think about your own death, about what life would be like without you – how your family will get by without you. Not exactly family dinner table discussion, right?
These are the types of things that you’ve got think about. So exactly how much life insurance do you need? This can vary greatly based on a number of things, like:
I certainly wasn’t a math major in college. My husband was, but he’s not too excited about solving a multi-variable math problem. It doesn’t have to be super difficult, but don’t make it too simplistic.
Many finance guru’s recommend simply multiplying your annual income by 10. It’s certainly easy, and might be in the ballpark for many folks. If you’re buying life insurance and you have literally one minute to come up with a number, then this is definitely the best approach.
But is the correct approach? Does a family with 2 working parents, 3 children and a $300,000 mortgage making $100,000 a year have the same life insurance needs as a single income couple with 1 child and a $80,000 mortgage making the same amount of money?
Nope. Unless you are debt free and have no children, this will leave you under-insured. Here’s a better way.
I wish I could take credit for this method, but I can’t. It was some super smart accountant. I searched for its origination to no avail. DIME is an acronym – it stands for “Debt”, “Income”, “Mortgage”, and “Education”. You take each into account as follows:
You will want enough insurance to pay off all of your debts. If your credit card balances and car loan balances total $30,000, that is the debt component of the calculation.
Add 10 times your annual income. If your income is $60,000, then $600,000 will be the income part of this calculation.
Add the outstanding balance of your mortgage. If you owe $100,000 on your house, then that is the mortgage part of the calculation.
You will want $100,000 for each child to pay for their college expenses. If you have 2 children, this would be $200,000.
In the examples I gave above, a family making $60,000, with $30,000 in consumer debt, a mortgage with an outstanding balance of $100,000, and 2 children will need $930,000 in life insurance.
Does this family sound similar to yours? And did that amount of life insurance give you sticker shock? If so, there’s a good chance you are woefully underinsured. That might sound like a lot of money coverage-wise, but it doesn’t mean that you will necessarily pay a lot of money for your premium. For your total life insurance needs, term is usually going to be your best value for your money. You can get the same amount of coverage for a fraction of the price of a permanent policy such as whole life or universal insurance.
Plus, buying term insurance allows you to change your insurance as your needs change. After all, your kids will eventually be out of the house and done with college.
To help out with this calculation, my friends at SoFi and Protective have put together an awesome calculator. This will do the heavy lifting for you. And in addition to this calculator, I’m so excited that they are actually launching their own term insurance product! Getting quotes and getting yourself adequately insured is a VERY easy process with SoFi and Protective.
Click Here to get a quote.
Life insurance is hugely important. But it doesn’t have to be difficult to understand, or expensive to pay for. For more information on life insurance and what your needs might be, check out the learning center that SoFi and Protective have put together.
This is a sponsored conversation written by me on behalf of SoFi. The opinions and text are all mine.
GREAT article Mark and Lauren. As someone who works full-time in this field, I would only have one thing to add, and that would be that an applicant should use an insurance broker who has many different sources/companies for the life insurance quote. This is because quoting at just one company (Protective Life in your article) may not have the best price and product for a particular life insurance applicant’s own unique situation. An applicant at one life insurance company could very well be denied as “uninsurable”, whereas at another company that same applicant could be “Preferred”!! (this is because many life insurance companies have “niches” where they specialize in and know a specific risk, such as diabetes, or cancer survivors, or even tobacco smokers). That’s my “two cents”, thanks for letting me share. And I love the DIME approach, I use it myself!
Thank you for the article and your helpful response (and funny handle!). Do you recommend both spouses have a life insurance policy, perhaps with different benefit levels?
Nicole – it depends on a few different factors. You have to think about things like if you die, would your husband have to pay for childcare for the kids? If he died, would you be able to go back to work. Those are all factors that I Would consider.
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Is this only applicable for someone in debt? This seems to over estimate what is needed IMO, as it doesn’t take into account assets left behind at all (retirement accounts, investment accounts, Social security survivor benefits)
I think you also have to take into account your “value” at home. We have more insurance on my husband because I’d have to hire out all the things he does around the house. on the other hand, he can do all the things I do.