Should I Get More Life Insurance As My Income Rises?

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  • The amount of life insurance you have is often a function of your income.
  • As your salary increases, it could pay to reevaluate your insurance coverage and make sure it's adequate.

Getting more coverage may not be a bad idea.

The purpose of putting a life insurance policy into place is to protect your loved ones in the event of your untimely passing. In fact, it's important to not only have life insurance, but also make sure your policy pays a generous enough death benefit to support your loved ones accordingly.

Now, there are different formulas you can use to determine what death benefit to lock in. But one method of calculating how much life insurance you need is to aim for a multiple of your salary. That multiple may be five times, seven times, or 10 times your annual earnings.

So, let's say you earn $80,000 a year and decide you'd like to secure coverage in the amount of 10 times your salary. That means an $800,000 death benefit.

But what if your income goes up over time? Hopefully, that's something that will happen. But at what point do you need to reassess your life insurance benefit?

Small salary bumps probably won't necessitate changes

It's common to get a modest increase in your salary from year to year. Many companies, for example, give out a cost of living raise with the purpose of helping employees maintain their buying power as inflation drives everyday expenses upward.

If you get a small raise -- say, 3% or so -- then there's generally no need to start rethinking your life insurance policy. In fact, you might get a 3% raise several years in a row, and even then, you may be fine with the amount of coverage you have in place.

It's when your salary increases substantially that it may be time to reevaluate your policy and secure additional coverage. This especially holds true if you begin to change your lifestyle or take on added expenses as your income rises.

Going back to our example, let's say you get a boost from an annual $80,000 salary to $82,500 one year, and then $85,000 the next year. In that case, you may not need to make any changes to your life insurance policy.

But if your income goes from $80,000 to $105,000 due to getting a major promotion, that's a different story. In that case, we're talking about a notable bump in your income, and one that could result in big changes in your spending. In that case, you may decide that an $800,000 death benefit is inadequate, and you'd like to secure more like $1 million in coverage.

A moving target

Even if your income rises to less of a degree, if it goes up to the point where you can comfortably take on more debt -- say, a higher mortgage -- then it pays to reassess your life insurance coverage. It's not unreasonable to move to a larger home if your earnings rise substantially, but then you'll want to make sure you have enough insurance coverage for your loved ones to pay off that property if you were to pass away.

As your income and expenses evolve, it makes sense to check up on your life insurance policy and make sure it provides the coverage you need. After all, if you're going to spend money on a policy, you might as well make sure it really does a good job of protecting the people you care about the most.

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