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Life Insurance: Do You Need Ten Times Your Salary?

For years the life insurance rule of thumb has been that you should purchase enough coverage that equals ten times your salary.  If you made $50,000 per year buy $500,000 of coverage.  If you made $150,000 annually buy $1,500,000 in coverage.  Pretty simple to figure out, right?  Well, like any rule of thumb, take this advice with a grain of salt.

For example, a single 35-year-old with no children and a salary of $75,000 most likely does not need $750,000 in life insurance.  Meanwhile on the opposite side of the spectrum, a stay-at-home parent technically does not have a salary; however, this parent saves the family thousands of dollars in child care alone.  Determining your life insurance needs takes a little more finesse than just multiplying your salary by ten.

Determining Your Life Insurance Needs

1. How Much

Life insurance is often referred to as income replacement.  You and your family currently rely on a steady stream of money to live.  Paychecks provide a place to sleep, groceries, clothing, schooling, doctor check-ups, and many other necessities.  If you died prematurely, where would the money come from to continue paying for these things?  If you suddenly died in a car accident, that does not stop the mortgage company from requiring a payment or your child asking “What’s for dinner?”

Yes, your salary is an important part of determining how much coverage you need, but what’s more important to consider is what your salary is paying for.  Compare the two individuals below.

At first, because Jane has a larger salary and higher mortgage, it may seem like she would need more life insurance coverage than Sally.  However, Sally’s children are quite a few years younger than Jane’s so they will be dependent upon Sally for longer.  Sally also has more children than Jane which means if she passed away, it would likely take her husband more years to become financially stable without Sally’s income to fall back on.

Using Quotacy’s

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