Financial Rule of Thumb: Get the Life Insurance You Need


Life insurance can be confusing and a bit intimidating. That makes it a prime target for the type of rule of thumb I've been exploring in this series. There are also a lot of misconceptions about life insurance: It's expensive, the application process is onerous or it's only for breadwinners, just to name a few.

However, sometimes the ease of a rule of thumb may interfere with ensuring a good outcome -- especially when a situation is already bad.

Rule of Thumb: Have 10 times your income in life insurance.

Why: Life insurance is a key element of your overall protection plan. Its primary purpose is to take care of the ones you love in the event you die. What does that entail? It could mean replacing lost income, paying off debts, funding education or other goals, or fulfilling important financial obligations. Death is not a very exciting or comfortable topic, but that doesn't lessen the importance of ensuring you have adequate coverage in the event something unthinkable happens.

Assessment: While most families need life insurance, defining coverage in terms of an arbitrary multiple of income doesn't work for me. Such an approach would yield a big fat zero for the coverage on a stay-at-home parent. In my mind, the adjustments, expenses and even career change of the primary breadwinner would all dictate some level of coverage for both spouses.

Goals vary. I've worked with couples who wanted to provide income for the survivor for a few years to allow him or her to get reestablished. I've worked with others where the goal was for the survivor to never work again. Those two approaches would yield very different requirements. As we age and, likely, earn more, this rule of thumb would call for more and more life insurance. However, debts might be closer to being eliminated; kids may have become financially independent; and retirement nest eggs may have been built over the years, which could all result in exactly the opposite: less required life insurance.

Instead of using this rule of thumb, consider letting your goals be the guide. What do you want to see happen if you're gone? What debts should be eliminated? How much income will your survivors need and for how long? What goals do you want to fund?

A calculator like this one at or this one at can help you, without too much effort, tailor coverage to your situation.

One final thought: Your goals can also guide you to the type of coverage you purchase. Temporary goals, such as paying off the mortgage, getting the kids out of college, and saving for retirement are best covered by term insurance.

Easy is not always the answer. Do a bit of work up front and live without financial worry.

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Life Insurance