The 12x annual salary rule of thumb
The 12x annual salary rule of thumb for the amount of life insurance coverage a person needs is only an estimate and does not take into consideration other key factors, such as the amount of assets you have, the amount s of mortgages and other debts like student loans, the needs/expenses of your beneficiaries, family members with special needs and the number of children needing their education funded
You can add $100k of extra life insurance coverage needed for every child you have (to fund their education expenses and college tuition)
Two reasons why you need enough life insurance coverage:
#1 - Help your beneficiaries pay off your debts, including interest, by providing them a cash payout from your life insurance policy when you pass away
- Mortgages
- Student loans
- Auto loans
- Credit cards
- Personal loans
- Any other loans (i.e., business loans) personally guaranteed by you
#2 - Help your beneficiaries maintain their lifestyle (plus inflation) by replacing your income with a cash lump from your life insurance policy
- Education (college tuition, books and other expenses; you can add ~$100k of extra life insurance coverage needed for every child you have)
- Medical expenses (current and unforeseen)
- Food
- Shelter (rent, mortgage payments, maintenance/repairs)
- Utilities (water, cellular/WiFi, cable/streaming)
- Transportation (automobiles, gas, public transportation)
- Entertainment (restaurants, movies, subscriptions, vacations)
- Rainy day funds (for unforeseen events and expenses)
- Inflation naturally increases all of the above costs
