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How much Life Insurance do you Really Need?

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There’s a better way to ask this question: how much money would my family need to reestablish life without me? Depending on who you listen to, you’ll probably hear a bunch of formulas that range from as few as five years to as many as twenty years of your current salary. So if you currently make $100k, that’s a range of $500k to $2 million. That’s not particularly helpful.

Instead of just using a year multiplier, really think about your current financial situation and what it would take to cover those expenses. Here’s one method to get to your coverage amount.

  1. Add up your mortgage and any other outstanding debts. The last thing you want to do is leave your family with debt payments. Let’s call these debts.
  2. Look at your current budget and figure out your annual budgeted expenses. Let’s call these living expenses.
  3. Decide the amount of time it might be reasonable to expect that the surviving spouse could reestablish a livable salary. It might be five, ten, or twenty years depending on your specific circumstances. Let’s call this duration.
  4. Multiply living expenses by duration to get a solid baseline of minimum coverage. Then add your debts.
  5. Consider and add any additional costs that you might incur without your spouse like child care, employment training costs, tuition to go back to school, funeral expenses, children’s college expenses, daughter’s weddings, etc. etc. Let’s call these additional expenses and add those to your total.
  6. Take your total and add an extra 5-10% of extra padding. When in doubt with life insurance, round up.
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