When it comes to life insurance, we are all a bit skeptical. We question what we genuinely need and we question the opinion of those whose interests are not aligned with our own. When purchasing life insurance (and for here we'll discuss term insurance), we are aware that the individual who is selling us life insurance has a conflict of interest as they make more commission the more insurance that we purchase. We are here to offer some independent advice.
Rule of Thumb: A traditional rule of thumb is to purchase 10X the amount of annual income you are currently making. We find this method dated and flawed.
The New Rule of Thumb is starts with the 10X rule and then adds $100,000 per child you have if you'd like to cover college costs for them and then make some estimated adjustments.
Our Recommendation: Start with the above, but think through the following as well.
How many years of income replacement would your family leave? Keep in mind, with investment and compounding, the insurance proceeds will grow each year. If invested properly between 4-7 percent.
In addition to annual income, what will change in the lifestyle for the surviving spouse and how much will that cost them? For example, will a move be necessary, will the spouse need to shorten their work load? Will additional childcare coverage be needed?
How much total debt will need to be paid off? Keep in mind that SOME student debt may be forgiven. Other debt to consider: mortgage, rental real estate, personal debt etc.
Will you want to cover college expenses for your children? If so, $100,000 per child is a good place to start, less what you think you have saved already for this purpose.
What else do you need to consider? Do you already have life insurance, do you have life insurance that will cancel as you change careers, do you have any family inheritance coming your way etc.
Your To-Do's: Try this formula as a place to start and then alter it based on what makes you feel comfortable. Add together the following:
1. 10X annual income (or another factor 10-15X your annual income based on your comfort)
2. Costs of life style changes for surviving spouse
3. Total debt
4. $100,000 X number of children
5. Any other factors to consider
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