How much life insurance should I get?
I have been getting this question lately.
The answer is very straight forward. You would assume that most families know how much they need. If you noticed I said families... because most people who understand the value of life insurance are the one who is married, aged 25 years or older, with children, paying some kind of rent or mortgage or own a home, and with income.
To understand how much you need, let's talk about what is life insurance and what it is not. Insurance by itself is the second layer in the financial planning pyramid.
Life insurance takes effect when you no longer able to provide to your family economically because you passed away.
Life insurance is not a luxury but a necessity.
Life insurance is not just about covering funeral expenses but should be enough to cover family expenses when they are grieving. Most families lose their wealth because when the breadwinner dies, they don't have enough money to continue living because the breadwinner did not plan for the unexpected and were forced to fire sale their assets. Fire sales are selling your assets cheap because you need the money right away.
Now let's figure out how much you need. It actually depends who will need it. You buy life insurance if somebody will suffer financially when you die. Simply put, you don't buy life insurance because you are going to die, but because those you love are going to live.
To start, lets calculate your economic worth. How old are you now? Then, when are you going to retire?
Calculate how much you'll make on your job or any income between now and when you retire. The answer is your economic worth.
Retirement Age - Age Now x Annual Income = Economic Worth
This is how much your family will be missing when you die. So there are two ways to use this formula. First, you can sum up all your earnings from now until retirement age and use that amount. Or you can multiply your annual income to 10 so you can provide up to 10 years of support to your loved ones and give them time to recover from your lost. For most families, 10 years is acceptable to make their life continue economically.
Reference:
https://www.moneyunder30.com/financial-planning-pyramid-11294
https://lifehappens.org/blog/4-things-life-insurance-is-not/