How much life insurance should we get?

My husband and I both work; our income split is about 60/40, he being the higher paid.

We will both turn 50 within the next year.

No children living at home.

No substantial debt:
Car loan: $185 monthly
Student loan: $102 monthly

Mortgage: $2,000 monthly

No other debt. We never carry a credit card balance.

We have about 3 months worth of savings in the bank.

Should I base our life insurance on how much we make, how much we have in debt or both? We are living paycheck to paycheck, and if either one of us were to die suddenly, the other would only have a few months to sell the house before we could no longer make the payments. In this market, I don't think that's realistic.

I was thinking that we would need enough to pay for a funeral, pay off the smaller two loans, and still have enough to live on for at least a year if the house doesn't sell. Does that sound right? Or should we not worry about paying off the loans...just calculate enough to replace the other's income for XX many months? If so, how many months should we plan for?

Finally, at what rate is life insurance taxed? Is it added to your income and then taxed at the rate for your total income for the year? or is there a flat rate tax? (I think I know the answer to this one, but I want to make sure).


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