How Much Life Insurance Do You Need?

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how much life insruance do you need?
I have a love-hate relationship with life insurance. On the one hand, I love it. It helped me get through college and have a life. It also helps me sleep at night knowing that my family would be taken care should something terrible happen to me (God forbid). I also hate it because many agents…

I have a love-hate relationship with life insurance.

On the one hand, I love it. It helped me get through college and have a life. It also helps me sleep at night knowing that my family would be taken care should something terrible happen to me (God forbid).

I also hate it because many agents misrepresent it. They sell you the wrong kind of insurance and the wrong amounts. Their primary objective is often to maximize their financial security, rather than yours.

Don’t let their character flaws influence your decisions about this important topic.

Do You Need Life Insurance? (Seriously)

Life insurance has only one purpose: to complete your financial responsibilities if you die.

That’s it.

If you have no dependents or anyone else that relies on your income, you don’t currently need life insurance. Don’t fall for a common trap: life insurance is not an investment.

If you do have dependents, you should buy term rather than whole life, in almost every case. I’m going to assume you are familiar with the differences between term and whole life insurance already. It is a good idea to familiarize yourself with your options, if you’re not.

Why Do YOU Need Coverage?

how much life insruance do you need?

It’s easy to complain about life insurance premiums. After all, we have to pay them each month but rarely see the benefits. This reluctance to make a monthly premium payment for something you won’t see the benefit might be one reason that you’re underinsured.

Before you figure out how much life insurance you need, stop, and think about the reason you are getting life insurance. This can help remove the sting of paying the premiums.

The point of life insurance isn’t to provide you with money for retirement or any other purpose (although some cash value policies offer those promises). It’s supposed to be a way for you to help your family.

According to a survey from John Hancock, many people see it as a way to cover final expenses. Twenty-five percent of Baby Boomers and 16 percent of Gen Xers see it as one way that the family can cover funeral costs and other costs, reducing the financial burden on loved ones.

When Do You Need Life Insurance?

Life insurance is there to replace your income if you die, so if you have anyone relying on your income, then you need life insurance. If any of the following situations apply to you, then you probably need life insurance:

  • You have dependents (children, spouse, partner, parents living with you, etc.)
  • Someone relies upon your income or the value you provide
  • You have a mortgage or other large debts
  • You have a large or complicated estate
  • You own a business or have a partner in a business

Life insurance can be used as a tool for estate planning and can be useful for avoiding probate or taxes in certain situations. If you have a large or complicated estate, then you should meet with a lawyer or estate planner to help you determine the best course of action.

When You May NOT Need Life Insurance

You may not need life insurance if:

  • You have no financial dependents and probably will not in the foreseeable future
  • You are retired and living off investments or other income sources, and your spouse or other dependents will have enough income from those sources if you pass before him/her
  • Children rarely need life insurance. The only time it makes sense to get life insurance on a child is if they are earning income and that income needs to be replaced if they die.

Note about children’s life insurance: Some life insurance companies will offer a rider on an adult’s policy that gives your child a few thousand dollars coverage, and depending on the company, may guarantee the child coverage after they turn age 18, regardless of their health.

The life insurance company I use offered $20,000 coverage for my daughter for an additional $2 per month on my life insurance policy, and the guarantee she would be eligible for coverage after age 18, regardless of health. Use your judgment on this type of plan.

How Much Life Insurance Should You Buy?

Remember, life insurance is meant to make up for your lost income. We need to figure out how long your dependents will depend on your income, or in the case of a stay at home spouse, the value you provide in taking care of children or running the household.

Another option to think about is mortgage life insurance if you feel it would be beneficial to your family, though term life these days may be a better value.

So, what’s a realistic amount to get?

One rule of thumb is to multiply your income by 17 and buy that amount of insurance. If you bring home $48,000 a year you need $816,000 in term insurance. This is a rough estimate but let’s see if the rule of thumb works.

Without getting bogged down in lots of detail, let’s make some assumptions:

  1. You and your spouse are 45 years old.
  2. You each bring home $4000 a month for a total of $8000.
  3. You have one child, age 7.
  4. You will retire in 20 years.
  5. The $8000 in monthly income allows you to save for your child’s education and your retirement.
  6. If one of you dies, your expenses will increase by $1000 monthly to pay for extra childcare for five years.
  7. Inflation will be 3% over the next 20 years.
  8. Investment return will be 5% over the next 20 years.
  9. You already have $150,000 in savings.

In this example, you need to replace $5000 in monthly income for the next five years and then $4000 for the next 15 years.

Tell you what, we’re just going to replace $5000 for the next 20 years and give the surviving spouse a little bonus for putting up with you as long as they did.

How Much Term Life Insurance Do You Need?

Using a calculator and inputting your desired income ($60,000), the number of years (20) and rate of return (2%), let’s see what we come up with.

  1. We used $60,000 because it represents $5000 in monthly income for 12 months.
  2. We also used 2% for the rate of return, which is 5% return less 3% inflation.

Mathematically, this isn’t 100% the way to do it, but it is close enough for what we need.

Input those numbers, and your result is $981,085. Now, subtract the $150,000 you already have, and you need to buy $831,085 in term insurance.

How long do you need it for? 20 years of course.

By then, according to your plan, you’ll have enough to retire on.

In this particular example, the result is pretty close to the rule of thumb calculation. You should buy $850,000 in term life insurance.

If we want to complicate this issue, we’ll notice the amount needed decreases each year. This exercise calculates the amount you need right now.

You could easily re-run this exercise each year to see if you still need the same amounts, or if you can call and reduce your coverage with the insurance company.

Just remember two things:

  1. Only buy inexpensive term life insurance for income replacement and family protection.
  2. Think of life insurance in terms of income replacement. How much income will you need and for how long?

Once you determine this, it’s easy to figure out how much you need to buy.

Get a Free Term Life Insurance Quote

Once you have a general idea of how much life insurance you need, you should take the time to shop around for life insurance quotes. In general, you want to stick with well-known companies who are in great financial shape.

There are three ways to save time when shopping for life insurance quotes: the first is to visit a life insurance agent. Many agents are great and will help you analyze your needs and help you compare quotes.

Unfortunately, some life insurance agents give the rest a bad name and will try hard to sell you an expensive whole life insurance policy they position as an “investment.”

The next method is to contact insurance providers on your own directly. This is time consuming and requires you to make dozens of phone calls or visit dozens of websites.

My preferred method to shop for a life insurance policy is to use an online tool which will help me compare several options at once, without having to deal with any sales pitches.

No dependents, no life insurance?

Here is a common situation: You are young and single, or you are a newly married couple where both spouses work (dual income, no kids). Do you need life insurance?

There are two sides to this argument – some say, yes, buy life insurance regardless of whether or not anyone is financially dependent upon your income, and others who will say not to bother. As with everything, there are different ways to look at this.

If you are young, you can usually buy a term life insurance policy cheaper now than you can a few years down the road.

The benefit of this is you can lock in lower life insurance rates, and you will already have coverage in place if something were to happen that would leave you uninsurable. (See why term life insurance is almost always better than whole life insurance).

In this case, you can buy a 30-year term life policy while you are young, healthy, and lock in less expensive premiums than if you were to buy a policy several years from now. As your needs change, you can reevaluate your life insurance needs and buy another policy if needed.

You will need to run the scenarios again to determine how much you need and for how long. This method can help you lock in lower life insurance rates now, and buy more life insurance as needed.

Remember, you can always more than one life insurance policy (check with your life insurance provider, as some companies may limit you to one policy).

What About Buying Life Insurance Through Work?

Many companies offer an automatic life insurance policy on all employees or offer employees inexpensive group life insurance. For example, my previous employer provided life insurance as part of our benefits, with a policy payout of 2x annual salary (we could purchase more at our expense).

These policies are fine as supplemental life insurance, but it may not be wise for them to be your only life insurance policy because jobs are rarely permanent. If you leave your job or are laid off, you may lose your life insurance at a time when it may not be easy or affordable to buy a new life insurance policy.

Here is an example of using your employer’s life insurance as a supplemental life insurance policy and not your only policy:

When I was in my early twenties I had a $50,000 policy through the military (SGLI), which was enough to pay for any incidental burial costs my family might have faced (I was in the USAF at the time, so I would have had a free military burial; the $50k policy was “just in case” and only cost $2.50 per month).

I didn’t see the need in getting a larger policy because I was single and had no dependents.

Get a Free Life Insurance Quote from Haven Life:

Click on the banner to the right to visit Haven Life for a free life insurance quote. Haven Life helps you compare life insurance quotes from multiple life insurance providers.

In short, they do the heavy lifting for you and help you get the life insurance policy you need without having to deal with heavy sales pitches. Haven Life will save you both time and money.

The form will provide you with a general idea of how much you might pay depending on your general health, location, and the amount of coverage you need. The quote is free, and there is no obligation.

 

Don’t wait to provide your family with the protection they’ll rely on in the event of your death; get instant life insurance quotes today. Your family will thank you for it!

You can compare life insurance policies from multiple insurance companies by visiting the Haven Life website.

Peace of Mind

While you’re alive, it’s still possible to feel good about life insurance. According to the survey, 88 percent of respondents think that they feel more confident about the family’s future when life insurance is involved.

If you worry about what could happen to your family if you’re gone, life insurance can provide peace of mind (which in turn helps reduce stress and anxiety and can be beneficial to your health). Sixty-five percent specifically pointed out that overall stress levels could be reduced with the purchase of life insurance.

We know that stress is related to several physical and mental ailments, so being able to reduce that stress can improve your quality of life and encourage better relationships with your loved ones.

This article is by Neal Frankle. Neal found himself in a financially fragile situation at the age of 17. Both his parents passed away while he was still in high school, leaving behind a small insurance settlement.

Neal sought out a financial advisor to help him invest his nest egg so that it would help put him through college. Instead, the advisor charted a self-serving course and was on the verge of burning through the money when Neal realized what was happened and fired him just in time to avoid losing everything.

The experience had a deep impact on Neal and formed in him a lifelong desire to help people learn to make smart financial decisions. Today, with more than twenty-five years of experience in the financial services industry, Neal is an author and avid blogger.

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About Neal Frankle

Neal Frankle is a Certified Financial Planner in Los Angeles, author, and blogger with over twenty-five years of experience in the financial services industry. His financial blog covers tips on how to make smart financial decisions. He is also the chief editor of WealthPilgrim.com, and MCMHA.org.

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  1. Dana says

    Bret…what do you think of going with a 20 year term policy at $1,000,000 and a $500,000 for a 30 year term. That way I can provide 1.5 million until I’m 60 and between 60-70 $500,000 would be available if needed?

  2. Lenny Robbins says

    No, I do not think you are over insuring. Especially with interest rates as low as they are. However, I would also make sure you both have a will and a trust set up as long as you are in the “financial planning mode”. You will want to speak with an attorney certified in your state that can help you with questions such as “What happens if…….”
    This whole procedure is not fun, but very necessary!!
    Good luck!

  3. Jody Allison says

    I disagree about the insurance for children, as I have witnessed the devastating effect that the loss of a child has on a family. Funds to take the time to grieve would have been very helpful, because while the pain of the loss never goes away, not having to return to work immediately can certainly reduce the related stress.

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