How Much Life Insurance Do I Need?

The question of life insurance involves a very unpleasant topic. We don’t want to think about the idea of our death or a loved one’s death, but as loving and responsible family members, we need to think about what our family will do if one of us happens to pass away unexpectedly.

Life insurance is a safety net we purchase to protect our loved ones in the event of an unexpected death. Your life insurance policy will disburse a payout to your beneficiary based on the level of coverage you purchase. A payout from a life insurance policy is not subject to taxes.

Who should buy life insurance?

If you have anyone in your life that is dependent on your income, you need life insurance. This applies to married couples with or without children, single parents, or any person who has the responsibility to provide for another person.

If you are single and do not have any dependents, you don’t need a life insurance policy. It may be advisable to have some sort of small fund, such as your emergency fund, that would cover burial costs if you happened to suddenly pass. But without dependents, there is a much lower need for life insurance.

What levels of coverage should I get?

For those who need life insurance, a good option for coverage is approximately 10-12 times your gross income. Make sure that the policy is based on your individual income from your job, not your total household income. The best way to handle a payout from a policy is to place the money into investments and to allow the growth from the investments to replace the lost family member’s income.

The idea is to invest the death benefit payout into good mutual funds and use the growth on the account to supplement the household income. If earning the S&P 500 average of 10% per year, this can give a family a substantial amount to work with. Either that, or the remaining balance on the house can be paid off.

Let’s say a family’s household income with both parents alive is $75,000 a year, and dad is the only one working outside the home. Dad and mom should purchase a policy for $750,000 of coverage on dad at a minimum, and about $250,000 to $400,000 on mom. They may want to consider a $500,000 policy for her if they have 4 or more dependent kids.

“I’m a stay-at-home mom. I don’t work so I don’t need a policy, right?”

Wrong! Contrary to various political ramblings, stay-at-home moms provide a great deal of economic value to a household. With mom staying home, taking care of the kids, and even possibly homeschooling, dad is then able to work full-time without also having to juggle the responsibility of watching the kids at the same time.

But let’s say mom passes away. What happens then? Dad needs to bring in help so that the kids are looked after while he continues to provide for the household. In many cases, this means a nanny or daycare, and that costs money. The policy’s payout, when invested in good funds, will create growth that can be used to pay those bills until the kids are grown and independent.

What type of life insurance policy should I get?

I only recommend term life insurance. A term life insurance policy will provide a defined payout if the insured person dies during the specified term.

Whole life policies are far more expensive than term insurance. They have a lot of fees inside the policy that are not present in term policies. A lot of whole life policies will have some cash value component inside of the policy, and the policyholder can borrow from this amount while alive if they desire to. Whole life insurance policies do not expire as term policies do, but the expenses can eat away at one’s disposable income that could provide greater value if invested in another vehicle.

Term insurance is a much better value. It is far cheaper than whole life, and if you die, the entire policy’s value is paid to you. There is no savings portion of the policy, so no cash value to take from while the policy is in force. But if you manage your money wisely, you’ll be able to invest the money you save with a term insurance policy over a whole life policy and make a lot more in your investments over a long period of time.

Some employers offer life insurance as a benefit. This is sometimes around 2 times one’s annual income, with options to increase the amount. I recommend having a policy outside of work to ensure that coverage does not end if/when you leave your current job.

So what type of term insurance should you get, and for how long? As I mentioned before, your policy should be about 10-12 times your annual income. Let’s think of one example.

Say this family is healthy and the husband and wife have three kids ages 7, 5, and 3. For the next 15-20 years, at least one of them will likely be dependent on their income. In this scenario, a 20-year term policy would suffice, one policy for mom and one for dad, with 10-12 times each parent’s income/annual economic value.

Let’s say that 10 years from today, dad passed away. The kids would be 17, 15, and 13, respectively. That’s still three mouths to feed for a few years. But with the life insurance payout, mom will be able to pay the mortgage, cash flow any remaining expenses for school, and be able to put that money into investments to live on. She may have to get a job, but the insurance payout eases the blow.

Once the kids are grown and gone, and there is a substantial nest egg in investments, the need for insurance drops dramatically. If you’re 55, have your house paid off, and no dependent children, you probably don’t need life insurance.

What if I don’t qualify for a life insurance policy?

Sometimes, certain medical conditions make one uninsurable. Conditions such as high blood pressure, cancer, and diabetes are some of the most common reasons why one may not qualify.

If this is you, there may be a few options. If you already have some policy out, keep it if you can. Even if the policy is a pricey whole life or universal life policy, it is at least something and the policy won’t be revoked.

If you have nothing at all, consider getting mortgage life insurance if you are a homeowner. These policies are comparatively more expensive than term insurance, but they are generally issued even to those with pre-existing health conditions.

The downside of this type of policy is that the benefit technically is paid to the mortgage company instead of to your designated beneficiary, and the defined benefit decreases as your mortgage balance goes down. But if there are no other options, it’s better than nothing, as your significant other and dependents can rest assured that they would be living in a paid-off home.

Where can I find a good term policy?

You can hop on Zander Insurance or connect with an insurance broker and pull up quotes from a variety of different companies. You can compare and choose a policy from that list of quotes.

If you have dependents, please get a good term life insurance policy! If something were to happen and you suddenly passed away, this is one way to save “I love you” to your family and make sure they will be financially set if there is a death in the family.

Need to discuss your family’s financial needs more? Schedule a free Discovery Session to equip yourself with the power to make good choices for your family’s future.

Note: This article was originally published in 2019 and was updated in May, 2021.

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