Life insurance needs vary
There is no magic formula for deciding how much life insurance you need. Factors like whether or not you have debt, if and how many children you have, and your own age have much to do with how much life insurance you should have.
Suze Orman’s take on life insurance
Suze says that you only need life insurance until you are 65 because at that time you will have your mortgage paid off and your retirement investments will kick in. She uses a formula of 20 x’s the amount of money it would take for your survivors to maintain their standard of living. For example, if it will take $50,000 to maintain your families standard of living, you should purchase a one million dollar life insurance policy. With interest rates of 5% you could invest the proceeds of the life insurance policy and live off of the interest without touching the principal.
Dave Ramsey’s advice on life insurance
Dave Ramsey also believes your survivors should live off of the principal of your life insurance proceeds. He has a more favorable view of how much interest you can get and says that multiplying your income by 8-10 will give you a sufficient amount. So in Dave’s view, you can need the same $50,000 per year, invest 500,000 at 10% and live off of the principal.
Clark Howard’s advice on life insurance
Lesser known Clark Howard doesn’t go into formulas. He uses the 10 times your annual salary formula to purchase life insurance with a reminder that both working spouses should have a policy.
Other factors to consider when deciding on how much life insurance to buy:
If you use a portion of life insurance proceeds to pay off the mortgage, the annual cost for a standard of living will be decreased. You could then buy less insurance.
It is easier to reduce the amount of life insurance you have than to increase the amount. For example, if you could invest the proceeds at 10% today, but next year you could only invest at 7%, the amount of insurance you need would be greater. The older you get, the more expensive life insurance becomes but once you purchase it, it can not be canceled because of a grave illness. On the other hand, you may be diagnosed with something that prevents you from purchasing life insurance later.