How Much Life Insurance Do I Need?
Most people setting out to buy life insurance have one question in mind: “how much does it cost?”. Unfortunately things are a little bit more complicated than that. There are different types of life insurance, different add-ons you can choose or leave out, a range of possible terms, and most importantly there is the actual amount of cover or death benefit.
So how much?
We will keep things as simple as possible, and remove the bells and whistles. However, you are still going to have to decide how much cover you need…
How much life insurance you need ultimately comes down to asking yourself “why do you need life insurance?”. If something were to happen to you, who would experience financial hardship and how much of a lump sum cash payout would they need to support themselves? Another scenario would be if you were hoping to insure a mortgage so that if you die your spouse does not have to worry about paying your debts in order to keep the house.
The most common use for life insurance is simple income replacement. Although many families these days consist of two working parents, it is usually the case that one or even both of you may require some low cost term insurance. In the case that one spouse earns far more and is the main “breadwinner” of the family, then it there is a clear case for protecting against the loss of their income. If something happens to them, the family would be in dire financial straits. In the event of both spouses working and making decent earnings, some might think “well if something happens to me then my spouse can always continue to work”. The response to that would be: if they didn’t need your income to help support the family, then why are you working now?
How much is enough life insurance?
A good rule of thumb, backed by extensive studies across multiple countries, is that you need about 10-12 times your annual earnings as a death benefit to replace your income if you die. For example, if you earn 50,000 USD per annum, then you would need a life insurance policy with at least 500,000 USD cover. People with larger families and younger children could find themselves needing even more cover. Although 10 times your earnings may at first seem like a lot of money, keep in mind that this needs to last 20 to 30 years. It often goes quickly.