How much life insurance do I really need? This is a very important question to answer. You do not want to be over insured, as this will cost you money you need not spend. You also do not want to be under-insured, as this will place you family and business at great financial risk.
If we knew the day we would die, we would know exactly how much life insurance to purchase…and when! Because we do not know when we will die, or when we will be diagnosed with a serious illness, or have a terrible accident, having life insurance in place, right now, should be a priority for your family and your business.
Because we do not know when we will die, or when we will be diagnosed with a serious illness, or have a terrible accident, having life insurance in place, right now, should be a priority for your family and your business.
How much life insurance do I really need?
That is a question that often leads to more questions. Here are questions we will answer in this article:
- What is my salary, and how much would I like to replace should I die unexpectedly?
- What is my spouse’s salary, and how much would I like replaced should she die unexpectedly?
- How many children do I have, how old are they, when will they be moving out of the home, and when will they go to college?
- When will I stop being financially responsible for my children?
- Do I need temporary or permanent coverage?
- Do I own a business I would like to continue after my death?
- What is my family’s health history, and have my parents passed on any genetic health issues to me?
- How much room do I have in my budget?
- What are my budget priorities?
- What can I afford?
- What about my employer-provided group plan life insurance coverage?
- What are my short-term financial obligations?
- What are my long-term financial obligations?
- Do I want one large life insurance policy or smaller life insurance policies?
- How long will I need this protection… 10, 15, 20, 25, or 30 years?
- Are you a high-income earner who needs a large amount of life insurance, but also is looking for retirement income?
- Do I want an investment component within my life insurance policy?
What is my salary, and how much would I like to replace should I die unexpectedly?
There has been a rule of thumb in the industry for many years you should multiply your income times 10; if you make $100,000 year, have $1 million worth of life insurance.
This is just the rule of thumb and ignores what your individual life insurance requirements may be. It also ignores that you may not be able to afford that much life insurance, based on your age or health condition.
A better way to determine how much you need is to sit down with your life insurance agent and talk about your current level of insurance protection, your current financial needs, and your future financial needs and obligations.
What is my spouse’s salary, and how much income would I like replaced should they die unexpectedly?
Many families these days are dual-income earning families. When a spouse dies unexpectedly, it has a devastating financial impact on the remaining family members.
Both spouses should own separate life insurance policies.
If one spouse is a stay-at-home spouse, that spouse still should have life insurance. A stay-at-home spouse is a caregiver for children 24 hours a day. The surviving spouse will have to pay for childcare after the death of a spouse…this costs a lot of money!
How many children do I have, how old are they, when they move out of the home, when will they go to college, when will I stop being financially responsible?
You may ask “How much life insurance do I need for my children?” If you love your children and want to make sure they will have a financially stable household after you die unexpectedly, then life insurance is a terrific solution.
If you have $500,000 to $1 million in the bank, then you may need no life insurance…but your family could likely still benefit from some additional life insurance protection.
Most families are only 2 to 3 paychecks away from losing their home and having their lives changed when a loved one dies. Life insurance is a great product to help minimize this risk.
Do I need temporary or permanent coverage?
Some people only like term insurance. Some people only like whole life insurance. Some people like a mix of term and whole life insurance. There is no right or wrong answer; it is simply about balancing your financial risk and determining what you can fit within your budget.
Do I own a business I would like continued after my death?
If you own a business, you are likely a key person in that business. That means if you died unexpectedly, the business you have worked so hard to build over the years may go out of business shortly after you die.
If you have a business life insurance policy such as a key person policy, it will provide the crucial financial funds to help keep your business operating, paying its debtors, and finding a suitable replacement manager to run your company. It will also buy your spouse some critical time if they want to sell the business.
What is my family’s health history? Have my parents passed on any genetic health issues to me?
If you have a family history of diabetes, heart disease, stroke, circulation problems, dementia, mental problems, or any other illness, then getting a life insurance policy before being diagnosed with a medical problem is smart. This will always result in the most affordable life insurance rates.
We cannot predict the future, but the wrong time to be applying for life insurance is after you have just been diagnosed with a serious medical problem.
We can still get you life insurance after a serious medical diagnosis, but it will be much more expensive, and the coverage amounts will be much less.
How much do I have in my budget?
This is not a trick question if your life insurance agent asks you how much room you have in your budget.
We only have so much money to spend each month to stay within our budgets. Some life insurance coverage is better than no life insurance coverage. As you earn more income later in life, you can always add more coverage if necessary.
What are my budget priorities?
You need to look at what people spend money on to understand their true money priorities. If you always have the newest TV, the newest fishing or hunting gear, or go out to eat 3 to 4 times a week, but don’t have life insurance…your priorities are very clear.
If taking care of your family is important to you, and you want them to be secure should you die unexpectedly…you will find money in your budget for life insurance. If you don’t, then it is very clear where your budget priorities lie.
What can I afford?
If you can only afford $25 in your budget for life insurance, then find a plan that will give you the most coverage for your $25 and purchase that life insurance policy immediately. Something is better than nothing!
Your life insurance rates will always be more expensive next year. If you are diagnosed with a serious illness, you will also become ineligible for more life insurance policies almost overnight.
What about my employer-provided group plan life insurance coverage?
These are great life insurance policies to have as an employee of the company. Remember you do not own this life insurance; it is “rented” while you work for your employer.
Has your employer guaranteed they will not reduce your life insurance benefit in the next 20 years? Has your employer guaranteed they will not change their benefit plans in the next 20 years? Has your employer guaranteed you employment for the next 20 years?
If your employer has not done any of these three things, then you would be smart to purchase a life insurance policy you own and control. You should get a policy before you get sick or are diagnosed with any other health issues to get the best life insurance rates.
What are my short-term financial obligations?
Term life insurance policies are ideal for short-term financial obligations. Mortgage protection, assuring your children’s college educations are paid for should you die unexpectedly, business loan obligations, and unsecured debt obligations are all excellent candidates for term life insurance policies.
What are my long-term financial obligations?
If you have longer-term financial needs and obligations, then maybe a “base” policy of whole life insurance policy is appropriate. And IUL may be another appropriate insurance option. Either way, talk with a life insurance agent that you trust who has your best long-term interests in mind.
Do I want one large life insurance policy or several smaller life insurance policies?
Some people prefer to purchase lower coverage amount life insurance policies as new financial obligations arise. This gives you the option of better controlling your budget expenses, and not spending any more than you need on life insurance.
Other people, however, would rather just buy one large policy and “be done with it” for the next 30 years.
If you do this, consider what your future financial obligations may be. Get a little more life insurance than you need now to cover your increased income earning potential and financial obligations later in life.
How long will I need this protection…10, 15, 20, 25, or 30 years?
If you have a 30-year mortgage, then a 30-year term policy may be appropriate. If you have a 30-year loan, and you will pay your house off in 22 years, then a 20-term life insurance policy may be appropriate. It is all about balancing your financial obligations and the money you have available for premiums.
By closely matching the coverage length time with your financial needs, you may save a sizable amount of money in insurance premiums over the years.
Are you a high-income earner who needs significant life insurance and retirement income?
If you are a high-income earner, your insurance, and your financial needs will be different than a middle-class income earning family.
If you are a doctor, you may not have a 401(k) plan. You will need a large amount of life insurance and need to provide future retirement income. Insurance products, such as an IUL or an annuity, may be a great fit.
Do I want an investment component within my life insurance policy?
For most families, insurance should not be looked at as an investment product. For some people, however, insurance products are great investments that allow you to have tax-free income later in life, have access to tax-free loans within life insurance policies, and have a lifetime life insurance component.
Here are some other questions you may want to ask your insurance agent:
Sometimes, just knowing the right questions to ask can help you better understand what the best insurance solution may be. Here are some popular questions on the internet you can use to work with your insurance agent to make sure you have the proper coverage for your age, family, or business.
How much life insurance do I need after retirement?
How much term life insurance do I need?
We hope this article has helped you understand some of the dynamics behind choosing how much life insurance you should own. We hope this is a good starting point for you. Reach out to us and we can help you with questions and help you get “dialed in” the appropriate amount of life insurance for you, your family, and your business.