“How Much Life Insurance Do I Need?” This question is asked on Google Search thousands of times each month! While there are countless online life insurance calculators, the process of determining how much life insurance is right can be quite confusing.
There is not a single CORRECT method to determine your life insurance need. In this article, we show you 4 methods used by the best Financial Experts around. We give you the pro’s and con’s, and let you decide for yourself.
- Clark Howard’s Recommendations
- Suze Orman’s Recommendations
- Dave Ramsey’s Recommendations
- ALLCHOICE’s Recommendations
The 4 BEST Methods To Determine How Much Coverage You Need
Before you become paralyzed in determining EXACTLY How Much Life Insurance You Need, the most important thing you can do is to make sure you have SOME life insurance!
Unlike most forms of insurance…there is a 100% probability that you are going to die (at some point). You can’t bet your family’s financial security on a “nothing’s going to happen to me” mentality.
That is WAY too much money! I wish my husband would have purchased LESS life insurance!
NO wife ever!!!
How Much Life Insurance Does Clark Howard Recommend?
Clark Howard is a consumer expert and well-known radio host. He gives financial advice on everything from shopping to investing.
Clark recommends taking your family’s monthly expenses and deducting your spouse’s monthly income. Then, annualize that figure and divide by 4%.
Why 4%? 4% is what Clark considers a risk-free rate of return that your family could earn in an investment. Once invested, your family could continue your current contribution to the monthly budget, thus replacing your income. Then, take that number and add all debts to get the total amount you need.
The Clark Howard Calculation
Death Benefit Needed = (Family Monthly Expenses – Spouses Monthly Income) x 12 ÷ 4% + debts
Pros Of The Clark Howard Method
- Gives a specific amount
- Accounts for lost income
- Accounts for debt
Cons Of The Clark Howard Method
- The math is complicated
How Much Life Insurance Does Suze Orman Recommend?
Suze Orman is an American financial advisor, author, and podcast host. She also had her own show, The Suze Orman Show, on CNBC for over a decade.
Suze’s method is a straightforward multiplication. Take your annual income, multiply it by 25, and that is the amount of insurance she recommends.
The Suze Orman Calculation
Death Benefit Needed = annual income x 25
Pros Of The Suze Orman Method
- Ensures lots of coverage
- Accounts for lost income
- Simple math
Cons Of The Suze Orman Method
- The number is large, may seem unreasonable
- Doesn’t account for debt
How Much Life Insurance Does Dave Ramsey Recommend?
Dave Ramsey is perhaps the most well-known financial advisor in the United States. He has helped hundreds of thousands of people take control of their finances. Like Suze Orman, Dave Ramsey also offers a straightforward equation.
Dave Ramsey recommends multiplying your annual income by 10 or 12.
Please note – ALLCHOICE Insurance is A Dave Ramsey Endorsed Local Provider
The Dave Ramsey Calculation
Death Benefit Needed = annual income x 10 (or x12)
Pros Of The Dave Ramsey Method
- Accounts for lost income
- Simple math
- Number is reasonable
Cons Of The Dave Ramsey Method
- Doesn’t account for debt
- Assumes you can make a 10% rate of return, but that’s hard to accomplish risk-free
How Much Life Insurance Does ALLCHOICE Recommend?
ALLCHOICE can see the benefits of all the above and respects these expert’s methods. In fact, ALLCHOICE is a Dave Ramsey-endorsed provider.
However, we tend to use a different rule of thumb. Granted, we prefer to sit down and break down a client’s finances to determine their precise need. But if you needed a quick answer, then we have a fourth method for you to consider.
We suggest taking your annual income and multiplying it by the number of years until your retirement.
This method is the only one that accounts for age. The younger you are, the more time you generally have to receive returns on your investment. Thus, we believe your age should factor into your decision.
This method doesn’t take into account if you have a young family, a big family, or dependents with special needs. It also doesn’t apply to estate planning; that’s an entirely different matter. But this is an excellent rule of thumb to get you started.
The ALLCHOICE Insurance Calculation
Amount of Life Insurance = annual income x # of years until retirement
Pros Of The ALLCHOICE Method
- Accounts for age
- Simple math
Cons Of The ALLCHOICE Method
- Doesn’t account for debt (though you can add it)
How Much Life Insurance Do YOU Need?
You’ll NEVER find a beneficiary on a life insurance policy that says, “This is too much money.” We joke about tempting others by putting a price on our heads, but, in all seriousness, it is your responsibility to take care of your family. Life insurance is the most cost-effective and efficient way to do that.
Coming up with the amount of coverage you need doesn’t have to be complicated. We hope the above methods have given you some options.
Long life is never guaranteed, so act today. If you would like more guidance, ALLCHOICE is here to help. Contact us today.
Clark Howard Recommends the following:
1. (Family Monthly Expenses – Spouses Monthly Income) x 12 = Annual Shortfall
2. Annual Shortfall ÷ 4% = Total Income Replacement
3 Income Replacement + Outstanding Debts = Total Life Insurance Need
Suze Orman recommends you purchase life insurance that equals 25 Times your annual income
Dave Ramsey Recommends you purchase life that equals 10 – 12 Times your annual income