How Much Life Insurance Do You Need?

When do you need life insurance? And how much do you need?

Many of us know that life insurance is a key factor in protecting our families if the worst ever happened. But have we really thought about what it takes to be prepared?

While it is widely agreed that life insurance is necessary, most Americans still don’t have enough or any at all!  The most recent LIMRA Trends in Life Insurance Ownership study showed that 7 in 10 Americans report having life insurance, up significantly since 2010, but that almost half of those who do have it still don’t have enough!

Luckily, term life insurance can offer you plenty of coverage at a low cost. Companies like Bestow or Haven Life even allow you to purchase high-quality life insurance online without a physical exam! All you have to do is consider how much coverage you need.

So, I’ve put together a few simple questions to get you started.

How much life insurance do I need?

There are a million “rule of thumb” guidelines out there for calculating how much life insurance you need.  An insurance salesperson may tell you to get enough for 7 to 10 times your annual salary, 25 times your spouse’s cost of living, or 10 times your income plus college expenses.

These rules are simple and easy to understand, but they annoy me almost as much as the one-size-fits-all rules for retirement savings.  In reality, how much life insurance you need is entirely unique to you.  Your life insurance needs to take into account the details of your personal life, your cost of living, and the financial situation you want to leave behind if you were to pass away sooner than expected.

To help you have a productive and thoughtful conversation with your spouse or partner, I laid out a series of questions below for you to discuss.  Every question may not be relevant to you, and the list is certainly not exhaustive.  However, these questions will help you realize what types of things you need to consider.

Thinking about death is hard and if you are in your 20s and 30s may seem premature. But the last thing you want to do is leave your family a pile of financial stress along with their grief.  100% of people die.  It is best to be prepared.

What should I consider?

If anyone depends on you, you need to have life insurance.  If you are married, have children, have any joint debts, or have a cosigner on any of your loans, you need to have life insurance.  It is the caring and responsible thing to do.  So how do you figure out how much you really need?

Debts

Covering debts with life insurance is not just a way to reduce strain on your significant other.  Many loans can go after your estate when you pass, so if you don’t have enough coverage your family may end up using any life insurance you do have to pay down your debt!  Make sure you have enough coverage for these expenses.

• Do you have a mortgage?
  • Are you and your spouse both on the mortgage or just one of you?
  • Would you want to pay off the entire mortgage for your family or would you expect them to move into a smaller house?
  • Would you pay off some of the mortgage and expect your spouse to refinance?  Refinancing on a smaller loan size could make payments more manageable.
• Do you have car loans?
• Do you have significant student loans?
  • Are your student loans federal or private? Federal student loans are discharged and canceled on death, but some private student loans can go after your estate.  If you have private loans, make sure you have enough coverage to pay them off.
• Do you have credit card debt or personal loans?
• Has anyone cosigned for any of your debts?  If so, make sure you have enough insurance to cover those debts, so the creditors don’t go after that person.

Income Replacement

Assuming you aren’t a family where one spouse’s income goes entirely to savings, your passing would cause financial strain on your family’s current budget.  You need to figure out how much money life insurance would need to provide to support your family.

• What would you expect your family’s cost of living to be after you passed?
  • How much of that cost could be borne by your spouse?
  • Would you expect your family to move to a cheaper area or otherwise reduce costs?
• Are you the breadwinner in a one-income family?
  • Would you expect your spouse to go back to work if you passed?
  • How much money could they realistically earn versus expected expenses and what you make today?
  • If you wouldn’t want your spouse to go back to work, consider what additional expenses they may have without you around.  Medical insurance when your family is no longer on your corporate plan may be significant!
• Are you a stay-at-home parent?
  • What is the cost of the services you provide for your family outside of childcare?  Not that childcare isn’t incredibly important, we are just going to cover that in the next section.
• How long would you want to provide support after you passed?
  • Would you want to support your spouse for their entire lives?
  • Would you expect living expenses to decline over time and your spouse’s income to rise, and you may only need to provide a few years of support?
• Do you want to provide enough insurance for your spouse to take a certain amount of time off of work after your passing?

Childcare & College Expenses

If you have kids, this is one of your biggest considerations when thinking about life insurance.  Losing a parent is an incredibly traumatic event for a child, especially one as awesome as you.  You want to ensure that your insurance covers their needs without uprooting their lives any more than necessary.

• How many children do you have?
• If something happened to you tomorrow, would your family’s childcare expenses increase?
  • Would they need extended daycare?
  • Would a nanny or babysitter need to be hired to be home with them before or after school?
  • If you travel for work, would you need a regular nanny to take care of the kids when you are away?
  • How many years until that care is no longer needed?
• Would you want to fund your children’s college expenses?
  • Public or private college?
  • Do you want to cover room and board?
  • How long until your youngest child starts college?
  • How much do you already have saved?

Discussing and determining your needs

With the questions to consider in hand, you have what you need to determine your life insurance requirements!  If you are nervous about starting the conversation with your significant other, begin slowly.  Talk about a few of these questions a week until it becomes easier and you are on the same page.  

There is no one-size-fits-all answer, but having a plan and proper financial support in place will make one of the hardest things your family could encounter just a little easier.

Do you have life insurance?  Had you taken into account everything on this list?  Let me know your experiences and questions!