How Much Life Insurance Do I Need?

This is a very important question about a rather 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 who 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, perhaps your emergency fund, that would cover burial costs if you happened to suddenly pass. But without dependents, a policy is not truly needed.

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.

So 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, and about $250,000 to $400,000 on mom, maybe $500,000 if this couple has 4 kids or more who are still dependent on their income.

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 policy should I get?

I only recommend term life insurance. Whole life policies are only recommended by the people that sell them and almost no one else in the financial industry.

Whole life policies are typically 10-20 times more expensive than term insurance. They are riddled with fees inside the policy that are not present in term policies. A lot of whole life policies will have some savings or cash value component inside of the policy, and the policyholder can borrow from this amount while alive if they desire to. However, over time, the fees in the policy grow, and will eventually eat away at those savings; not to mention the fact that if you die, and the policy is paid to your beneficiary, the insurance company keeps the cash value!

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 are following the Baby Steps program, 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.

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 your family is healthy and you and your spouse have three kids ages 7, 5, and 3. For the next 15-20 years, at least one of them will likely be dependent on your income to some extent. 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 as mentioned above.

Let’s say, God forbid, 10 years from today, dad was to pass away. The kids would be 17, 15, and 13, respectively. That’s still three mouths to feed, and a few college tuitions to pay for. But with the life insurance payout, mom will be able to pay off the mortgage, cash flow any remaining expenses for school, and be able to put that money into investments to live off of for the rest of her life.

Once the kids are grown and gone, and there is a substantial nest egg in investment accounts, the need for insurance drops dramatically. If you’re 55, have your house paid off, and the kids are no longer dependent on your income, you probably don’t need life insurance. The point of life insurance is to be that layer of protection until you get to Baby Step 7, where all investment accounts are maxed out and you don’t have a payment in the world.

Where can I find a good term policy?

You can hop on Zander Insurance 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.

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