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How Much Do I Need?

QUESTION: Dan on Twitter asks if term life insurance should be purchased based on current earnings or future ones.

ANSWER: I always say about eight to 10 times to 12 times your income, and it’s usually in talking about current income. If you have a reason to project your future income jumping up that’s very much a sure thing and you want to go ahead and insure through that, there’s nothing wrong with that. An example might be you were in residence finishing up your medical degree, so you’re making $40,000 or $50,000 a year but you’re getting ready to go to $200,000. Yeah, you could go ahead and buy substantial life insurance at that point. That’s pretty much a lock if that’s the track you’re on in your medical studies and that kind of a thing. That’s a way to look at it.

But just, “I think I’m going to make more because I’m really smart,” no. I’d just go ahead and buy current income or a little bit more, but don’t go, “I know someday I’m going to be making $500,000 a year, and I make $30,000 now.” That’s not what we’re talking about here. If you have a fairly close window in the next three or four years, you have a real reason that’s logical other than your feeling about yourself that your income is going to shoot up, then yeah, if you want to go ahead and buy a little more, that’s fine. There’s nothing immoral about it. You’re just buying extra insurance. I just don’t want you to buy more than you need. That’s what it comes down to—more than your family needs.

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