If you’ve been reading LearnVest for any amount of time, you’ve probably realized by now that life insurance—which gives you a financial safety net if you or your spouse dies—is important. Really important.
Like life-and-death important.
(Need convincing? Read this heartbreaking story from a daughter or the five ways that life insurance can save your family. We on the same page now? Good.)
After you decide that you need life insurance, the next question should be: How big of a one-time payment would you need? Is $50,000 enough? $500,000? A million?
The magic number that will bring you and your family peace of mind is different for everyone. But there are some ways to figure it out. Hint: $50,000 is probably not enough.
We asked LearnVest certified financial planner Rachel Sanborn to walk us through how she would advise a client on picking the right amount of life insurance. You’re about to get professional advice. For free.
(P.S. Because most people would benefit most from term life insurance, we’re assuming you’re planning for a one-time payout in case of a death. To see the instances in which you would want whole life insurance—which acts more like an investment vehicle—read our life insurance guide.)
Who Should You Insure?
Your first thought might be just to insure the working spouse and skip insuring the stay-at-home parent—after all, a SAHP doesn’t earn any money. But you’d be missing a crucial aspect: If one partner passed away, the surviving partner would probably have to pay for childcare, which can be equal to a small salary in itself!
RELATED: Life Insurance 101
What if both spouses are working? Again, you’d be forgiven for thinking that if one passed away, the surviving partner could live and support the family on one salary. Not really. For example, maybe one spouse contributes more than the other. Or if you split childrearing expenses, how would the surviving partner come up with the other half?
The only situation in which you wouldn’t insure a partner would is if all the money that person earns goes exclusively to lifestyle choices and not to raising the kids, paying off debt or subsidizing shared expenses. But, even then, you’d still need to cover funeral costs.
So if you’re married, you’ll probably go through this coverage calculation twice—once for your own coverage and once for your partner. We’ll walk you through that crucial calculation in five steps.
Step 1: Talk With Your Spouse
The most important thing to do before you start talking numbers on your own coverage is to get your partner involved. “The policy you take out on yourself is really for your spouse and vice versa,” Rachel says. “The person who’s going to be the beneficiary should be very involved in making those decisions.” So sit down with your partner and do the math together on your own coverage.
Step 2: Follow a (Very) Simple Rule of Thumb
Rachel says that seven to ten times your salary will normally be adequate for life insurance. But this quick math misses some crucial nuances. For example, how do you decide seven to ten times a stay-at-home parent’s hypothetical salary? Or let’s say that your family has major outstanding debts.
Bottom line: If you recognize that you’ll only get around to acquiring life insurance if the math is super simple, use this rule of thumb. But if you want coverage that’s tailored to your family and life, read on for a more detailed breakdown.