When it comes to life insurance planning, our clients want real answers. They ask questions like, “How much insurance do I need? Is it affordable? How long should my policy last?”
These are important questions! We answer them below using practical formulas and straightforward talk. Once you have a good foundation, purchasing life insurance for yourself and your family is a much easier task.
Covering Your Most Important Liabilities
For the majority of consumers, there are a few key things to consider when calculating how much life insurance to buy. The top three items most people need to account for are:
- Lost Income
- Debt Obligations
- Education Expenses
Let’s dive deeper into the three liabilities above.
Income Replacement: When a primary breadwinner passes away unexpectedly, it turns an uninsured (or underinsured) household upside down. Families of all ages need to consider lost wages – and then factor in a number of years worth of replacement.
For some that might be five years of wages, but for others it will be longer. A good rule of thumb is seven to ten years worth of lost income. Insuring for this amount provides a sizeable nest egg allowing your family to rebuild and maintain their lifestyle. Those with several young children and a stay-at-home spouse should consider larger amounts.
Covering Debts: Whether you’re single or married with a family, it’s important to account for any debt you’ve accrued. Those with a spouse and/or children do not want to leave large obligations behind. This might include school debt, a mortgage, credit card or business liabilities.
A suitable life insurance policy wipes the slate clean. While not all debt transfers at death, several types do – so accounting for large amounts like home loans are wise.
The Cost of Education: This debt applies to families with children who are college bound. Higher education costs are astronomical. Providing a lump sum that covers tuition costs for your children eases a significant financial strain for families. It may not need to cover the entire amount, but a good policy provides enough benefits for those who will need them. Some families may also want to account for pre-college private schools their children currently attend.
Of course, there are several other miscellaneous factors when it comes to life insurance planning, but accounting for the three is a primary objective. Others might consider extended family, charity, estate planning taxes, special needs children or other personal items. Adding the most relevant items together gives most families better insight into their number.
What Type Of Life Insurance Do I Need?
Most of our clients choose and benefit from term life insurance. It’s the least expensive policy type and it can be tailored to meet your needs. It’s easiest to think of a term policy like a rental. You purchase (or rent) it with an expiration date.
The idea is your life insurance needs decrease over the years. Children grow older, debt is paid down or eliminated, and your savings and investments increase. Your obligations will likely be much less in the future than they are now. A term policy accounts for time needed to reduce most large liabilities.
How Long Do Most Policies Last?
The most common term life insurance policies last 30 years. This usually affords enough time for the insured(s) to become financially established. Other policies might last a shorter period of time – say 20 years. Typically, you’re thinking about an age when children are out of college, your home is paid off and your assets have grown.
What If My Insurance Needs Change In The Future?
If you have less need for life insurance later, you can reduce your death benefit and lower your costs. Otherwise you can cancel your policy early if it’s no longer needed. There are zero provisions forcing you to keep your policy and pay premiums for the entire term length.
And there’s always the chance you might need more life insurance – or for your policy to last longer. If you purchased term insurance, then know you can convert some policies to a whole life policy at maturity. This is usually expensive, but if you don’t qualify for new insurance, it might be your best option.
Otherwise, you can look at purchasing a new term, whole or universal life insurance policy. Depending on your needs you may want to consider permanent life insurance from onset – or a mix of permanent and term life. This strategy works well for those who have insurable interests with an indefinite timeline. We’ll help your understand your best options.
What About Life Insurance From Work?
Most large employers offer some amount of life insurance or accidental death coverage.
While you can count on these policies to some extent, it’s important to remember that group policies are smaller and they do not follow your from job to job.
Many consumers are freelancing now. You may seek different opportunities in the future. It’s important to lock-in a plan while you are young, healthy and insurable. You want one that’s always there for you no matter your employment situation.
And you want to make sure you have enough coverage to account for the liabilities mentioned above. Simply put, most people underestimate how much life insurance to carry. And some overly rely on work benefits that are subject to change.
Calculating Your Coverage Number
Assuming no special circumstances, you can calculate how much life insurance you need using the factors above.
For example, let’s say you make $100K a year, have $350K in total debt between mortgage and educational liabilities and you have two children who will likely attend college.
We could multiply $100K by five, add the $350K and then add another $300K for college tuition. That would put your number at $1.15 million. You could subtract other savings & investments while also factoring in a spouse’s salary. That would equate to around a $1 million dollar death benefit for 20-30 yr term. While that might seem high, it is a common number we see.
By clicking on the “View Life Quotes Now” links on this page, you can see how much that might cost. Your age, gender and health will determine your overall rate. However, it’s not unusual to see a $1 mil 30 yr term policy cost well under a $1,000 a year.
Contact Us To Discuss Your Life Insurance Needs
We get it – purchasing life insurance isn’t always easy. You’ll need to account for several variables over a somewhat undefined period of time.
Our independent life insurance agency will guide you through the process. From calculating a realistic number while also factoring in your overall health, we can arrive at a suitable solution to fit your needs and budget. Contact us today!