How much is enough? Life insurance edition

How much is enough? Life insurance edition

How much is enough?  I think this question applies not only to retirement savings but life insurance as well.  I’ve read articles that say you need enough life insurance to replace ten years of your salary.  The argument here is that in case you die, your dependents can maintain their current lifestyle without you.  Then there are folks who write things like this:

“I read your article about how much life insurance you own, and how you calculated the amount needed. My comment is this… “What’s your wife going to do when the 2 years of income runs out?” Great, you’ll have no mortgage, but she’ll have to sell the house to survive the lost income.  I can’t believe she hasn’t divorced you for forcing her into a re-marry or starve position.  Maybe she makes that much more than you do, so your income is disposable?”

Here are some of the questions that crossed my mind before I bought my existing life insurance policy:

  • I am very fortunate to have life insurance benefits at work.  Did I need more life insurance?
  • Do I need whole life insurance at this point in my life?  These policies are more expensive than term but there are some benefits that come with whole life insurance over term insurance.
  • How long might I need the life insurance?  A friend of mine who is in the insurance business told me years ago something that stayed with me – insure against a catastrophic loss not just any loss.  What level of insurance would be enough?
  • What liquid assets do we have?
  • Should my life insurance fulfill part of my retirement plan?  Enough for my spouse to live from?
  • How much debt should we insure against?
  • What about “final” expenses?  Do we have existing policies in place to cover that?
  • Life insurance gets more expensive with age so maybe it’s a good idea to rid myself of debt/liabilities sooner than later.  How soon could I be debt free?

The answer to “how much is enough?” for life insurance comes in all shapes and sizes, which makes personal finance personal for many reasons.

Personally, I figure “enough” to cover a few years’ salary (or in this case, a loss of salary) plus enough insurance to pay off all debts is likely plenty for most folks in their working years.

After that, potentially you can self-insure and we intend to. 

How did you determine how much life insurance was enough?  What things did you consider that I didn’t think about?

14 Responses to "How much is enough? Life insurance edition"

  1. I can’t believe you got an email like that! That’s pretty out of the left field. We have enough life insurance to pay off the mortgage and take care of expenses for a couple of years. We also have investments and we make about the same amount of money, so we know that both of us would be fine in the case that something (god forbid) happened.

  2. I’ve seen the rule of thumb that 10X income is close to the number. For young, healthy people life insurance is super cheap right now (in my experience). Like you said though, your circumstances should determine your coverage.

  3. Another thing to keep in mind for those who have group coverage through their employer is change. The change I’m talking about not only includes a change of job, but also a change of coverage. Since you don’t own your group coverage, your employer may decide one day to cut costs and reduce the amount of coverage for the employees. Even if you think you have enough coverage through your employer, it’s worth pondering if the coverage is really that secure going forward.

    1. True Brian, it depends, because like retirement planning I think life insurance is not a static exercise, it changes over time. This is in regards to employer benefits, your personal situation and the industry that provides these products to consumers.

      Thanks for your comment.

  4. Interesting email you received there! Luckily for me I have great coverage at work so I haven’t had to think of adding to that or any other external coverage aside from the stuff my work already covers. Once we start a family I will take a closer look and reassess our needs. Each situation is different so what works for some may not work for others and vice versa

  5. I went for 8 years of salary coverage due to the age my children (at the time my first was about to be born) and our current financial situation. I wanted to be sure my wife could stay home with our kids until they were in school and still have some leftover. Like you said it is a personal decision.

    By the time our kids are all in school we will have significantly increased our net worth and liquid assets. Plus my wife will be back to work so we really won’t need this level of coverage and it will be time to re evaluate our needs.

    1. It’s very dependent upon your personal needs Zach and with kids, I suspect you need some comprehensive coverage for many years.

      Once kids are more self-sufficient, different ballgame. Thanks for sharing your perspective.


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