What Should Your Life Insurance Payout Be? Here's What Suze Orman Says

The number might surprise you.

There's a reason financial experts like Suze Orman think life insurance is so important. Without it, your loved ones might struggle financially in the event of your passing.

Let's say you're the sole earner in a household that consists of yourself, a spouse, and two young children -- so young they aren't even in school yet. If you were to pass away, where would money come from to pay the bills? The answer could boil down to life insurance.

But it's not enough to just purchase life insurance and call it a day. You'll need to make sure you're buying the right amount of coverage.

Now if you ask Orman how much life insurance to put in place, she'll tell you that you should have enough to cover 20 to 25 times your annual income. And that might amount to a lot of money. But there's one option that might make that level of income replacement reasonably affordable for you.

Get the right insurance

When it comes to buying life insurance, you have a couple of primary options -- whole life insurance and term life insurance. The former will cover you for the rest of your life, and your policy will eventually accumulate a cash value that you can cash out or borrow against.

But whole life insurance can be prohibitively expensive -- especially if you're looking to buy enough coverage to replace 20 to 25 times your income. And that's why Orman says term life insurance is a better bet.

Term life insurance only covers you for a preset period of time. But it's also far more affordable than whole life insurance. And if you want to take Orman's advice and secure enough coverage to replace your salary 20 to 25 times over, then term life insurance may be the more optimal route for you.

Do you really need such a high life insurance payout?

While Orman thinks replacing 20 to 25 times your salary is the right move, some other experts will tell you that replacing 10 times your salary is just fine. To arrive at the right figure, consider your financial situation and expenses.

Do you have a large mortgage your surviving spouse would be unable to pay on their own? Do you have a lot of money in your savings account? Does your spouse have solid workforce skills that render them likely to be able to find a good job? These are all things to consider.

At the same time, you'll need to get quotes from life insurance companies to see if 20 to 25 times your salary is affordable for you. If not, you may need to settle for a lower payout -- and that's okay.

The most important thing is to make sure your loved ones have some protection in the event of your passing. If you can't afford a life insurance policy that gives you 20 to 25 times your income, but you can swing one that gives you 10 times your income, do that rather than wait until you reach the point where you can buy the more expensive policy. That way, you give the people who mean the most to you some immediate peace of mind.