Do I really need 10x income life insurance?
What is the rule of thumb on how much life insurance coverage you need? Consider getting up to 30X your income between the ages of 18 and 40; 20X income at age 41-50; 15X income at age 51-60; and 10X income for age 61-65.
The classic 10x rule1
While this method is the most basic, it can work as a base, as long as you adjust it based on factors we'll discuss in step 2. The 10x rule simply means you take your annual salary and multiply it by 10 to determine how much life insurance you need.
10 times your income
Perhaps the most well-known calculation model is multiplying your annual income by 10. For example, if you make $100,000 per year, you'll need $1 million in life insurance. In another version of this rule, you'll add an extra $100,000 per child to cover the costs of their education.
The most basic rule of thumb is the income rule, which states that your insurance need would be equal to six or eight times your gross annual income. For example, a person earning a gross annual income of $60,000 should have between $360,000 (6 x $60,000) and $480,000 (8 x $60,000) in life insurance coverage.
Core Ramsey Teaching: You only need life insurance while you have people depending on your income. Buy a 10–20-year term policy worth 10–12 times your annual income. Since life insurance is only for the short-term, you should only buy term life insurance. (Hence the name.)
Suze Orman recommends that generally most people should get a 20 year term life insurance policy at 20 times your annual income. What does that mean? That means if you're 30 years old and you make $50,000 a year you should get a million dollar 20 year term life insurance policy.
What percentage of your income should you spend on life insurance? A common rule of thumb is at least 6% of your gross income plus 1% for each dependent.
The amount you can put into your life insurance policy before it becomes a Modified Endowment Contract (MEC) is determined by the IRS's 7-pay test. This test calculates whether the total premiums paid within the first seven years of the policy exceed the maximum amount that would pay up the policy completely.
By age 40, you should have accumulated three times your current income for retirement. By retirement age, it should be 10 to 12 times your income at that time to be reasonably confident that you'll have enough funds.
Retirees must balance life insurance benefits against the ongoing costs, especially if they lose their job-based coverage. If you retire with debt or still earn some income for your family, keeping life insurance in retirement is a good idea.
At what age should you stop term life insurance?
There isn't any age cut-off that makes life insurance no longer worth it; it's all about your personal situation. That being said, it is often worth having life insurance after 65 if you have dependents who rely on you financially.
Get a term life insurance policy worth 10–12 times your income.
We generally suggest seven to 10 times your pretax annual salary as a starting point, but the life insurance calculator below will give you a more precise recommendation based on your needs.
The average cost of life insurance for a $500,000 term policy is $29 per month. This coverage offers more than just funeral expense relief; it can also cover mortgage payments, educational costs and daily living expenses for years. While many insurers offer this policy, costs and benefits can vary.
The average cost of a life insurance policy ranges from $40 to $55 monthly. The true cost varies by the type of insurance, coverage amount, and personal factors. Permanent insurance tends to be more expensive than term life insurance and is used differently.
Any permanent life insurance policy with a cash value can be used to invest — but for most people, it isn't the best strategy due to high costs and low returns. Buying a term life policy and contributing to a 401(k) or IRA account is often a better option.
Annuities offer better investment and income benefits while you're alive. Your return is higher because you aren't also paying for life insurance coverage. Instead, all the money is put toward an investment. Annuities also offer more income options, like guaranteed income for life.
Do rich people pay life insurance? Yes. The proceeds of a life insurance policy are tax-free to the recipient and if the wealthy purchaser of the policy follows the rules, the proceeds are not part of the taxable estate.
Dave recommends a policy amount of 10-12 times your annual income with a 15- to 20-year term, or up to 30 years for younger families.
Key Takeaways
Life insurance offers financial protection to surviving beneficiaries in the event the insured policyholder dies. A financial advisor who sells life insurance can earn a large initial commission based on the first year's premium and 3% to 5% annual commissions for as long as the policy remains in effect.
What happens if you live longer than your term life insurance?
If a term policy expires, it typically ends without any action needed from the policyholder. The insurance carrier sends a notice, premiums stop and there is no longer a death benefit. If the policy included a return-of-premium feature, the policyholder would receive a check for the premiums paid during the term.
The contestability period is typically two years from the date of application, during which time the insurance company has the right to investigate any information on the application that may be deemed inaccurate or fraudulent. If any inaccuracies or fraud are discovered, it can deny coverage or rescind the policy.
Do not subtract other amounts that may be withheld or automatically deducted, like health insurance or retirement contributions. Those will become part of your budget. The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings.
A good calculation for life insurance needs is: Add up the financial obligations you want to cover (such as a mortgage balance, your annual income for a certain number of years, future college costs, etc.). Then subtract assets that can be used toward obligations (such as savings and existing life insurance).
How Long Do You Have to Pay Into a Life Insurance Policy Before It Pays Out? Life insurance will pay out upon the death of the insured as soon as it is in force with the first premium payment.
