Life insurance is a touchy subject for some. After all, it’s almost always associated with death. It might be time, however, to look at life insurance through a different lens. Investing in life insurance isn’t about death. It is about taking steps to care for your family while you are still living. To that end, the question you should ask yourself isn’t whether you need life insurance or not. The question should be how much life insurance do I need?
How much life insurance should you have?
Most insurers offer policies in fixed amounts, such as $100,000, $500,000, and $1,000,000. However, life insurance coverage could be as low as $25,000. Ultimately, it is up to you to decide how much insurance you need to protect your family in the event of your passing.
In an ideal world, everyone would opt for the million-dollar policy. In many cases, however, that type of policy may not be possible. Instead of automatically shooting for the highest payout, you have to be practical and really analyze your situation and what you can afford. There are four main things to consider when determining how much life insurance you need.
- Your expenses
- Your current financial situation
- What expenses you would be leaving behind
- What types of policies you can qualify for
Let’s dive into it.
What are your annual expenses?
The first thing you should consider is your annual expenses in relation to whether you are a single or dual-income household. If you are single, living alone, with no dependents, then you may be able to opt for less coverage that covers only your bills, debt, and burial expenses.
On the other hand, if you have dependents – such as a family or aging parents – then you should take into consideration how much your income impacts the financial stability of your home. For example, if you have a working spouse who will continue to work, then your family may not need to depend on your policy to cover the entirety of the household’s expenses.
On the other hand, the trauma of your death could put a newfound burden on your family and kids, which could impact the household’s income. In this case (and any other case where losing you would be a huge financial burden), financial advisors suggest multiplying your annual expenses number anywhere from 10 – 15x to determine your coverage amount. Roughly speaking, this will give your dependents years to live off the lump sum benefit payment, cover outstanding expenses, and plan for the years ahead.
How old are you?
How old you are can play a huge role in how much insurance you need because it can signify where you may be in life. For example, if you and your spouse are younger and don’t have children, then you may only need a policy that will cover your spouse for two to three years. This would give your spouse time to find a new stream of income and adjust to life without you.
However, if you are young or middle-aged, and you have a family with minors, then you will likely need to increase coverage. You might want to invest in a whole life policy or a term policy that will last until your youngest has reached adulthood. That way, if you pass, the policy can provide at least five to 10 years of coverage for your family.
Lastly, if you are in your late middle-ages or older and your surviving spouse does not or cannot work, then you may need similar (if not more) coverage. Things you’ll have to consider are
- Your medical bills
- Your debt
- The mortgage
- Your spouse’s health condition, needs, and medical bills
- Whether you have surviving children willing to take on responsibility, etc.
Do you have any debt?
Another life insurance consideration is how much debt you and your dependents have. Debt can include credit card balances, student loans, mortgages, car loans, personal loans, or a HELOC (home equity line of credit). If you are the sole breadwinner, and even if you and your spouse both work, your death will not only mean a severe reduction in terms of income for necessities but also for satisfying the debt. This can lead to much additional financial strain and in some cases, serious financial problems like bankruptcy and foreclosure. Remember when shopping for a policy that part of your expenses are debts, and that these debts sometimes last for decades (in the case of a mortgage, for instance).
What will your final arrangements be like?
Another consideration may strike you as morbid, but it is necessary to think about. This consideration involves family customs, personal beliefs, and preferences around burial. Depending on the type of burial arrangements you would prefer for yourself, you will need at least $5,000 to $12,000 set aside to cover end-of-life costs. Some cemeteries are more expensive and have annual fees. Other options’ expenses, such as cremation, can vary by state.
Though it’s not pleasant to consider, these costs will eat away a chunk of the final death benefit paid out to your dependent. For instance, if funeral and burial arrangements cost $20,000 and you only have a $100,000 policy, this means 20% of the policy will go toward your final arrangements.
What if the benefit is spent too soon?
The biggest concern when deciding how much life insurance you need is the possibility that the payout will be spent too soon. To be fair, this is a common concern, but there are ways to make sure your benefit lasts for as long as needed.
Many insurance companies allow you to set up a disbursement plan, which lets you to specify when the money should be used and for what the money is intended to be used. Alternatively, you could set up a trust. With a trust, a fiduciary party, such as a lawyer, is responsible for following the guidelines and administering the funds. In setting up a trust, you could
- Parcel its value to your dependents
- Invest the money
- Set conditions for when the money can be paid out
FAQs About How Much Life Insurance to Buy
How much term life insurance do I need? How much whole life insurance do I need?
Whether you choose to get term or whole life insurance, we recommend that you get 10 – 15x your annual income. However, it is possible to be overinsured. At Principled Life, we advise that you re-evaluate your policies each time you go through a major life change, such as starting a family, buying a home, entering retirement, etc.
How much life insurance do I need at age 50, 60… ?
At this age, many invest in term life policies. The amount of coverage you need will depend on your financial situation and the financial situation of those you leave behind. If everything is in order, and your spouse can support him/herself, then you may only want to leave enough for burial ($5,000 – $20,000).
However, if you are leaving behind medical bills, mortgage, debt, etc. then you should opt for an amount that matches or exceeds what you estimate the bills to be. That way your survivors aren’t burdened with the bills you leave behind.
How much life insurance do I need for my kids and spouse?
The answer to this is dependent on how old everyone is in this scenario, as well as your income and yearly expenses. As previously mentioned, financial experts recommend purchasing 10 – 15x your annual income. However, this number can be personalized to meet your estimated needs. A good formula to use is the DIME method.
- D (Debt): Consider how much debt you are leaving behind.
- I (Income): A good reference number to multiply your income by would be the number of years until your youngest child turns 18.
- M (Mortgage): Add the mortgage to your total.
- E (Education): Consider the cost of college tuition for your dependents.
The best way to find out how much life insurance you need to protect your family is to talk to an experienced insurance advisor. The independent life insurance brokers at Principled Life are ready and waiting to answer any questions you may have, so call us today!
