How much Life Insurance should one Buy

For anybody who knows me, they know that I hate insurance. It’s horrible. Very rarely does any good come from insurance. Even when there is a claim to be made on insurance, where they will cover a certain event, insurance companies find loopholes so they don’t have to pay. Even when they do pay, the money doesn’t come quickly.

However, life insurance is a great thing for me, and something I make sure to take advantage of. However, it might not be necessary for everyone. In my situation, I have a wife and child. My wife and I have decided that she would stay home to raise our child until she reaches pre-school. If I were to pass away, I would want to make sure my wife doesn’t have to worry about day care and getting a job or anything like that. But I didn’t know how much insurance to get. So I did some thinking…

First of all, I wanted to make sure there were NO bills when I died. So I added up all of our debt. Luckily, outside the mortgage, it wasn’t a lot.

Mortgage balance: $230,000
Student loan balance: $14,000
Credit card balance: $1,000

That is it. So I would need $245,000 to cover bills. I rounded up an extra $5,000 to $250,000.

Next, you have to calculate funeral expenses. Again, I round to the high side, so I figure $15,000. Now the total brings me to $265,000.

And if I were to pass away, would I want to change my wife and my goal of my wife raising our daughter until pre-school? Not particularly. So I added another $110,000 to my total to cover most of my salary between now and when my daughter went to school.

I never took into consideration the fact that my work has a $40,000 life insurance policy on me, because I want that to be a bonus.

In total, I bought a $375,000 term life insurance plan. I had to do term life so I could afford it, as my wife and I don’t have enough money to do anything else. Add the $40,000 from my work, and my wife would be left with $415,000. After she paid all bills, She’d be left with $150,000. With that, she would make about $7,000 per year in interest, which she could put into a savings account for our daughter. I feel that I am sufficiently providing for my family in that instance.

So how much should you buy? I suggest following this formula, no matter what your situation:

Total Debt + Funeral Expenses + 3 years salary.

You can tweak this depending on your experience, but I believe that this formula is the best. Just remember, how do you want to leave your loved ones when you go? I prefer to add as little stress to their lives considering how much stress they would be going through.