Keep in mind, life insurance is meant to make up for your lost earnings. So we need to shape out how long your dependents will depend on your income.
One rule of thumb is to increase your income by 17 and buy that amount of insurance. So if you bring home $48,000 a year you need $816,000 in term insurance. This is a rough estimate but let’s see if the rule of thumb works.
Without getting bogged down in lots of detail, let’s make some assumptions and break this down.
1. You and your spouse are 45 years old.
2. You each bring home $4000 a month for a total of $8000.
3. You have one child age 7.
4. You will retire in 20 years.
5. The $8000 in monthly income allows you to save for your child’s education and your retirement.
6. If one of you dies, your expenses will increase by $1000 monthly to pay for extra child care for 5 years.
7. Inflation will be 3% over the next 20 years.
8. Investment return will be 5% over the next 20 years.
9. You already have $150,000 in savings.
So, in this example, you need to replace $5000 in monthly income for the next 5 years and then $4000 for the next 15 years. Tell you what, we’re just going to replace $5000 for the next 20 years and give the surviving spouse a little bonus for putting up with you as long as they did.
1. Only buy term life insurance for income replacement and family protection.
2. Think of life insurance in terms of income replacement. How much income will you need and for how long?