Well, today we will discuss a frequently asked question: how much life insurance do I really need?
In this article, we will show you the path to calculate the coverage you need.
We suggest buying coverage 10 – 15 times your annual income.
For example, let’s assume your monthly salary is $5,000 and you earn $60,000 per year. (We are not taking bonuses in account).
So, you can buy a life insurance with coverage $60,000 x 10 = $600,000 to $60,000 x 15 = $900,000.
It is just a basic idea we all try to follow, but, there are lots of things associated with it.
Let’s dig in…
Do You Really Need A Life Insurance?
It is the first and the most important question to answer.
Honestly, you don’t need life insurance in every situation.
You don’t need a policy if you are
- Financially solvent.
- Has no mortgage or loan.
- No dependent family member.
- Has enough cash or property.
- Already has money for funeral expenses.
Let’s consider the opposite story. You are married and have a spouse, and children who are dependent on your income. Moreover, you have a loan and a mortgage to pay.
In this situation, if any unexpected happens, your family will be in big financial trouble.
To get relief from such situations, you must consider buying a policy.
Of course, buy it today. With each day/year passing by, the premium will increase. We all know age is a big factor in the term of life insurance.
Is the Coverage of 10 to 15 Times of Annual Income is Correct?
Choosing the right amount is like playing Chess. If you do right, you will definitely win.
At the beginning of the article, we said that we are giving you just a basic idea. There is no rule of thumbs.
Each and every person has diverse needs and we have to calculate accordingly.
It’s always not necessary that you have to buy 10x – 15x of your annual income. If you have other assets that can give financial support to your family then you don’t need to buy big coverage.
You must reminisce that the bigger the coverage the higher the premium is. Hence, we suggest choosing the most efficient coverage amount.
Let’s Consider 2 Scenarios Here
Scenario 1:
Mark has two children and a wife living in his own house. Mark earns $70,000 and his wife $65,000 yearly.
There is no mortgage for the house and he has a good amount of savings in the bank. An only headache for them is the educational cost for their children.
So, if mark buys only 7x of his annual income ($490,000), it will be enough to cover the education expenses of his children.
By doing so, he could save a big amount in premium as the coverage is decent and realistic.
Scenario 2:
John has one child and a wife living with his parents. He earns $90,000 annually and his wife doesn’t work.
He bought a house that has a mortgage. In such a situation, John must buy a huge amount of coverage to fulfill all his family’s needs.
Here he may consider 17x of his annual income ($1,530,000). Moreover, for his parents, he could buy senior life insurance at a lower price.
How Long A Life Insurance Term Is?
It also depends on your financial condition. Generally, we see most of the people are worried about their mortgages.
If the only issue is a mortgage, you should definitely choose a term policy of 15-20 years that can cover the expense of the mortgage.
Let’s say the mortgage amount is $950,000. So, if you take a term policy of 20 years, with coverage of $100,000 will be enough for you.
Because, you are already paying the monthly payment for your mortgage, so, by 20 years you will almost pay all the installments of the mortgage.
If any unexpected doesn’t happen within these 20 years, you will get the policy’s benefit which you can use to cover your other expenses as you have already paid the mortgage installments.
How Do Debts Affect Your Life Insurance Policy?
Debt has a very close relationship with the coverage amount.
We see most of the people are worried about their debts and mortgages.
Hence, it is a must to consider the debt amount in life insurance coverage.
Death doesn’t end your liabilities. Death is really hard and can destroy a family. No one wants to leave the financial burden on their loved ones.
Do I And My Spouse Need Life Insurance?
The truth is both of you need a policy. In this modern era, we see husband and wife have separate financial liabilities.
Both of you work, to make your life easier you two can buy a policy.
Moreover, joint policies are cheaper than traditional policy. Risk factors are divided into two, hence, insurers offer lower premiums when you get a joint plan.
How Much Life Insurance For The Seniors?
Most of our clients are seniors, so, we decided to put this section in this article.
It is always good to get life insurance at a younger age. But, if you were not aware at that time, you can be now.
Depends on age
Let’s say you are 80 years. At this age, you may still have some debts on you. So, your plan should be enough to cover the debts, funeral, and medical expenses.
The situation changes when you are over 85. There is life insurance for seniors to cover some special needs. However, seniors don’t need $1M in coverage. Covering the funeral and medical expenses could be good enough.
If you want to leave some extra money for your family, you can consider that as well.
The average funeral cost in the USA is around $10,000. So, buying a $15,000 coverage is good enough at a senior age.
Advice From Experts Around The Country
If you are looking for further advice on how much life insurance you actually need, we’ve collected numerous pieces of advice from experts. Read on to find out what they say.
“Life insurance is income replacement in case a death occurs so that your loved ones are not financially impacted.
Therefore, the amount of life insurance an individual needs depends on their current income as well as their existing and future financial obligations.
To figure out the amount of life insurance an individual may need, first they should determine the amount of their family’s current and foreseeable expenses.
For example, if they have children, include current expenses, such as daycare costs and account for future expenses like college.
If there is a stay a home parent, they should account for how much income they would need if that parent needs to go back to work versus staying home.
In addition, they will also need to account for current loans like mortgage, and auto, and any possible future expenses such as medical bills or funeral costs. Add all these together to determine what the total debt and expenses are.
In addition, answering these three questions can also help give a good idea of how much coverage a person may need:
- Would the surviving spouse want to be able to pay off the mortgage?
- Would the children want to know that they were left with enough money to pay for their college education?
- Would the family want to be able to maintain the same lifestyle that they had been provided?
As a way to help individuals calculate their life insurance needs, there are quick and easy calculators available that can help determine the coverage amount.”
Terri Arias-Crespo
Manager Customer Experience Group, Vantis Life Insurance Company
“Many insurance agents would like to simplify things by advising that you buy a multiple of your income, such as 10x your income. If you made $50,000 per year, then you would purchase $500,000 of life insurance.
Others will add in your debt, so if you also had a $500,000 mortgage, then your total life insurance need would be $1,000,000.
I’m here to say that BOTH methods are at best, an oversimplification and at worst, it can cost your beneficiaries dearly by not placing enough coverage on you.
How so? These calculations involve a single number that takes a snapshot of you at the current moment.
But in fact, this number is not static. It is perpetually changing. It does not account for the fact that over time, your income will increase, your mortgage will be paid off, less income is needed to be replaced as you approach retirement and more.
Based on these factors, your insurance need is likely to be a curve that decreases over time. That’s great, but how do you design a policy with a decreasing death benefit?
Simple, by stacking multiple coverages with different terms in a process called laddering. You can ladder life insurance by buying term-10, term-20, and term-30.
When the term is up, you simply let it lapse and continue with the rest of the coverage. This way, your total death benefit starts out at the maximum and decreases every 10 years as you drop the term coverages one by one.
This method can be used by people of all ages and accurately calculates their life insurance needs.
Bottom line: The amount of life insurance you truly need is not a static number, but can be more accurately described as a decreasing curve. You can ladder life insurance to design your coverage based on this curve.”
Brian So
Founder of Brian So Insurance
“It’s pretty straightforward, you need to ask yourself two questions. If God forbid, I’m not here tomorrow, how much cash do my family and loved ones require monthly/annually to continue living in the same home and paying the same bills, including unanticipated future costs like college or child care?
What are the monthly expenses that need to be covered if your paycheck is no longer coming into your home?
Mortgage, utilities, insurance (car, home & health), car payment, food, clothing… you get the idea? Perhaps you’re a stay-at-home parent, taking care of young children.
If something happens to you, how much money will your spouse need to hire someone to do continue doing all the tasks around the home that you’ve been taking care of?
Hiring a nanny or someone to take care of your kids every day after school can be expensive. You need to guestimate what these potential costs may be and figure that into your calculation.
If you’ve just started a family and have very young children, 20 years would be a good place to start as their most dependent on you financially during the period of time up to adulthood.
Perhaps you’re a senior. You don’t have kids but your partner still requires money to continue paying bills and or debts after you’re gone.
In this case, maybe 10 years is plenty of time but what if you want to leave some cash to cover funeral costs? You’re going to want to make sure that the insurance is there regardless of whether you pass away tomorrow or when you’re 93.
Once you’ve determined how much money your dependents will require and for how long, you simply multiply.
So for example, if you know your family will require $60,000 a year over the next 15 years, you’ll need $900,000 of life insurance ( $60,000 X 15 years = $900,000).
Likewise, if your spouse and adult children need $30,000 to continue to come in for the next 10 years, your insurance need will be $300,000 ($30,000 X 10 years = $300,000).”
James Heidebrecht
Owner of Policy Architects
Why Buying Life Insurance Today?
We all want to save money and this is the reason. If you buy a policy today you are 1 day younger than tomorrow.
Yes, a policy works like this.
A day or month matters a lot when you are considering a policy. It is always wise to buy a policy earlier than possible. If you could buy it today then do it. But, don’t forget to do the proper research.
Coverage analysis and choosing the right insurer are the two most critical parts.
