Is 5 years of wages a good measurement for how much life insurance to purchase?
I've always been told to have five years of wages covered by life insurance. I am in my early thirties and I have two young children.
Maybe. That is simply one of the ways that people use to land close to the X when trying to land ON the X. One way to determine what the amount should be is based on what you spend right now, per month. If it costs about $6,000 right now to get your family through a month of life, then you know that it would take about $5,000 to get the job done if you were not around (there being no expenses for you at that point). Using $5,000 as the monthly bucket of cash to keep life going as it is going now, you then extrapolate: a 1-year bucket is $60,000. A 5-year bucket is $300,000 and a 10-year bucket is more. With a 5-year bucket, my wife and kids can keep living like they are living now for five years, with no new dollars coming in.
Want more years of financial stability for them? Buy a bigger bucket. Can't afford a bigger bucket? Buy a smaller one.
By the way, the number that you come up with may in fact be equal to five years wages, but I simply see that the wages approach deals with what you might make, while my approach deals with what you actually spent last month (which is a hard number not a soft number), and it relates primarily to your needs rather than to what the paycheck is.
Kirby | 05.20.16 @ 19:16
General Yes/No rule of thumb:
YES if: You are married and have a working spouse (roughly equal to what you make) AND you have no desire to help with (or pay for) your children's college.
NO if: You are a single parent (or have a non-working spouse), and you want to pay for your children's college.
Also. NO if: You have multiple real estate properties (either business or commercial). Or you are planning to add additional properties in the future.
Feel free to contact me with further questions.
Good luck! | 05.24.16 @ 20:17