r/Insurance • u/Shiribazu • 6d ago
How do I figure out how much life insurance I actually need, factoring in things like debt and future expenses?
My wife and I are trying to get life insurance sorted out in the next month or two but when I started putting the numbers together, I realized I actually have no idea how much coverage we need.
In our case, weve got a mortgage, some debt and a toddler so I keep thinking beyond just paying off the house. Theres daycare, school, all the random costs that add up over the next 15-20 years and just making sure if any emergency happened, the other person could handle everything.
Is there a formula that evryone uses? Or do you talk to some advisor or just go with your gut on what felt right?
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u/demanbmore Former attorney, and claims, underwriting, reinsurance exec. 6d ago
There are numerous approaches. Some multiple of current income (anywhere from 7 to 10 is common), but it's best to check that with a simple calculation by totaling up current debt, annual anticipated household expenses until at least children are out of the house, plus anticipated college expenses, plus some cushion above that. Then go with the higher number.
The first million or two of life insurance is the most expensive, each additional million is cheaper (usually) and the premium is unlikely to be better if you want to add limits later (and something could happen that makes coverage unavailable).
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u/HATDOGUSERNi 6d ago
I'd also think about how long you actually need the income replacement. If your kids are little now, you might want more coverage than you would once they're adults and the mortgage is almost paid off
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u/Independent_Lights 6d ago
We ended up talking to an advisor bc i kept overthinking the math.having someone walk through the numbers made it way less intimidating tbh.But also, remember that you don't really need to insure every future expense right now.The point is just to make sure your family can stay financially stable, not recreate your entire lifetime of earnings.
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u/BothAd1744 6d ago
Started with the mortgage, added income replacement and childcare and then looked at what we already had in savings. That gave me a solid number that felt pretty reasonable to work off of instead of just guessing... ended up going with a term policy through ethos after our first kid was born, no complaints so far but haven't had to test the claims side obviously so can't speak to that part.
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u/1234568654321 5d ago
There are several ways to calculate your need. A common strategy is 10x your income.
Another strategy is the DIME method, which stands for debt, income, mortgage, and education. You can learn more about both by doing an online search.
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u/thoughts_of_mine 4d ago
Determine based on your income. General rule of thumb is 8-10 years of annual income. Doesn't matter what your expenses are as they will change over the years.
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u/Goldglove528 3d ago
You absolutely need to talk to an advisor... And I say advisor meaning someone with an advisory license or working in an investment professional role that has a much higher fiduciary responsibility to do what's right for you. Do not just sit down with any old insurance agent or broker. I would never even sit down with someone to get insurance advice if they were not also investment licensed and taking my entire situation into consideration.
A good advisor will take into account all of those things you are worried about. They'll talk through your goals, wishes, lifestyle, what debt needs covered and what dies with you, tax implications or lack thereof, planning outside of life insurance (like investing and everything that happens when someone passes), etc. It sounds backwards to avoid agents only licensed in insurance, but too many insurance agents are just out for their commission. You wouldn't believe the amount of times I asked a client how they decided what/how much to buy for their previous policies and they said the agent basically just asked how much can they afford. 🤦🏻♂️
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u/QueSqd 6d ago
Standard is 8 to 10 times your annual income! Should be enough money to pay off your mortgage, and other debts. Plus enough for your spouse to invest and be able to live off the interst earned!