How much life insurance do I need? It’s a crucial question millennials need to ask themselves. It is necessary to know how/why you need it. Any insurance agent can recommend you buy life insurance, but a sales pitch doesn’t solve anything.
Answering the challenging questions allows you to adequately prepare.
- Preparation is Key
- Why Preparation and Life Insurance Go Hand in Hand
- 1. L-I-F-E Method
- 2. Dave Ramsey’s Stance
- 3. Suze Orman’s Recommendation
- 4. Calculate Your Needs
- Next Steps
Preparation is Key
Living in the midwest, weather can be sporadic.
It can be 50 degrees in the middle of January one day. The next day 20 degrees with snow.
It’s funny when the weatherman (or woman) start predicting a snow storm that is supposed to arrive in a week…The forecast calls for 2-8 inches of snow.
As we get closer to the day of the storm the forecast changes.
People get upset with the meteorologist because he/she can’t predict the exact outcome.
The business owners that push snow during the winter have to plan ahead for these snow storms.
Do they have enough help lined up to drive trucks, shovel sidewalks, and spread salt?
Will they have enough salt to spread on sidewalks and parking lots?
Are the plows on the trucks?
Are the snow blowers fueled up?
For the businesses that clear snow during the winter, preparation is key. It is their livelihood. They can’t predict exactly what will happen the day of the storm. It may miss us. Or it could snow more than expected.
No one can predict tomorrow. Let alone the next hour.
However, you can prepare.
“Failing to prepare is preparing to fail.”John Wooden
Why Preparation and Life Insurance Go Hand in Hand
Preparation is part of everyday life. Getting dressed, brushing your teeth, and combing your hair…all are ways we prepare for our day.
Some of us are more prepared than others. Do you know anyone that lays their clothes out on Sunday for the coming week? Or that person who makes their meals for the entire week ahead of time?
The late John Wooden, UCLA Bruins Hall of Fame basketball coach (1948-1975) would say, “Failing to prepare is preparing to fail.”
I want to share with you 4 ways you can determine how much life insurance is right for you.
This may be one of the hardest, most uncomfortable conversations you experience. Although, it is better than your loved one bearing the financial burden in the event you’re no longer around.
No one gets up in the morning and decides to build a house. It takes planning. The same is true with your financial future.
1. L-I-F-E Method
For starters let’s use the acronym L-I-F-E. Follow the questions below. Write down your answer for each one. Once you complete it, total your answers. That will give you how much life insurance you need.
What do you owe money on? Your home, autos, student loan, credit cards, business loan? Could or would your loved one be able to carry these expenses by themselves?
How many years would your spouse need your income if you passed away?
Take your annual income times the number of years he/she would need it. Here are some things to consider…
Do you think your spouse would remarry possibly 5-10 years later? It’s a strange question to ask, but if you’re a millennial reading this, if the sudden and unexpected happened he/she may remarry.
Think of it like this; if you’re 30 years old, would your spouse need your income until retirement age? Maybe…If he/she remarried, they may not need your income for 35 years.
Or you are a single parent. Do you know who would be the guardian of your kid(s)? Depending on how old they are, do you want to leave enough money so the guardian can afford additional expenses? At least until they reach the age of 18. So if your kid is 5 now, consider your annual income times 13 years.
How much would a funeral and everything associated with it cost?
Again, another hard question to ask yourself or loved one. Everyone has different expectations when it comes to planning for this.
Do you want to leave money for your kids future education? Maybe you want to leave money to a charitable organization?
If you answer no, that’s ok. Some people have the desire to do so.
2. Dave Ramsey’s Stance
How much life insurance should I buy?
Dave Ramsey recommends 10 to 12 times your income.
If you make $80,000 per year, you should have somewhere between $800,000 – $960,000 of Term Life Insurance.
But what if your income will increase significantly in a couple of years? Here’s what Dave has to say…
“If you have a reason to project your future income jumping up that’s very much a sure thing and you want to go ahead and insure through that, there’s nothing wrong with that. An example might be you were in residence finishing up your medical degree, so you’re making $40,000 or $50,000 a year but you’re getting ready to go to $200,000. Yeah, you could go ahead and buy substantial life insurance at that point. That’s pretty much a lock if that’s the track you’re on in your medical studies and that kind of a thing. That’s a way to look at it.”
*Taken from How Much Term Do I Need? with Dave Ramsey
3. Suze Orman’s Recommendation
Suze Orman recommends buying a life insurance policy with a death benefit 20 times your dependents annual income needs. Here’s more from Suze…
“Carefully think through how much money your family would need to maintain their standard of living, if an income-earner dies. I want you to multiply that amount by at least 20, to get what your target death benefit should be. That is the sum your heirs will receive if you die while the policy is in force. Why 20x? Because I want your family to be able to invest the money conservatively–say in high quality municipal bonds–and live off of the principal. And if a goal is to help pay for a young child’s future college costs, that too needs to be factored into this calculation.”
*Taken from The Massive Mistake 4 in 10 Parents with Young Children Make…and how to fix it in four easy steps with Suze Orman
4. Calculate Your Needs
Last, but not least, below is a link to an automated tool. Plug in some basic info and it will help you determine your life insurance needs.
The reality is death brings with it a ton of emotions. The last thing anyone grieving needs is financial stress.
Life insurance (or love insurance) allows you to pass that burden to the insurance company.
You can’t make those plans after the fact. When it comes to money it requires a plan. Yes, insurance should be part of your financial plan.
Take some time to determine how much life insurance is right for you and your family.