No one wants to think about death — but ignoring the likelihood doesn’t change the fact that you continue to need to prepare for the worst. A huge part of this planning process is choosing a life insurance policy.
In writing about how to save on life insurance, I mentioned that you shouldn’t buy an excessive amount of coverage. After all, if you buy more insurance than you\’ll need, you’re just throwing money away. But that begs the question…
How much life insurance coverage do you need?
Unfortunately, there are no easy answers. In reality, my wife and I have bought and re-bought new life plans several times in the past 5-10 years even as tried to get it right. The real challenge for people like us has been that the “right” answer is really a bit of a moving target. As our income has expanded and our responsibilities have increased, we’ve outgrown our coverage.
Given our past experiences, I thought I take the time to share what we’ve learned. Understand that I’m talking specifically about term life insurance quotes policies here. I’m a big proponent of the view that you need to keep your insurance and investment needs separate — basically, buy term and invest the difference!
Do you even need life insurance?
Depending on where you’re at to have, it’s possible that you don’t need term life insurance at all. For example, if you’re single and possess no dependents, you might be able to escape without buying a policy (even though it might be a good idea to have enough to repay your funeral expenses). However, if others depend on you for ones income, then you’ll likely want not less than enough coverage to replace your earning potential, at least temporarily.
Related: When Should Millennials Buy A life insurance policy?
Life insurance rules of thumb
If you poke around online, you’ll find a number of websites that claim how the ‘best’ approach to determining your life insurance needs will be to simply buy a policy that matches a certain multiple of your annual salary. The challenge here is determining the correct multiple.
Should you purchase a policy for 8x your annual salary? 10x? You could start to 12-15x? In the end, this really boils down to what you desire your life insurance to do. If you’d want your life insurance policy to provide support in your family for an extended period, you’ll obviously demand more. If you’re comfortable with your insurance plan being a short-term stopgap, you can get away with less.
An alternative strategy to buying an arbitrary multiple of your respective salary would be to use an online insurance coverage calculator. In this case, you enter data on anticipated one-time expenses, ongoing bills, timeframe, and so on. Then, the calculator will spit out an answer.
Don’t forget employer-provided coverage
Another aspect to consider when determining just how much life insurance to buy is whether or not you\’ve coverage from work (and in what way much). In many cases, as valuable because this sort of coverage can be, it’s vital that you not become too influenced by it. After all, if you lose your livelihood, you’ll also lose your life insurance.
What about a non-working spouse?
Another important thing to think about is whether or not you have a non-working spouse. Also, you’ll have to decide ought to purchase coverage for them (we did, more below). However, you also have to worry about your spouse incurring expenses that aren’t directly reflected in the salary.
Learn More: How Much Life assurance Does a Stay-At-Home Parent Need?
Perhaps probably the most troublesome point in this context is medical care insurance. In our case, we have great health insurance coverage coverage. Unfortunately, it’s linked with my job. Since my spouse stays home with the kids, and since we’d want her to continue doing so at least for awhile, we will need to plan for private health insurance.
Other factors to consider
Are you relatively early along as part of your career path? Do you plan on expanding you and your family? Do you anticipate any other major alterations in the future? If so, then it’s likely that your life insurance needs will change (perhaps dramatically) during the years ahead.
There are two main methods for dealing with these sorts of things. Is to try and project your needs and size yourself insurance policy accordingly. The other is to the right policy for today, and consequently replace it at some point in the future.
Did You no doubt know? Four Types of Life Insurance Which have been a Complete Waste of Money
Both of the approaches have their downsides. Overbuying now ensures that you’ll spend more than necessary temporarily. However, if you wait to buy more coverage, you are in danger that you’ll fall ill while in the interim, and your rates increases dramatically.
How we approached it
In the conclusion, determining your life insurance needs is a very personal matter, and broad recommendations are unlikely to provide you with the suitable answer. This last time around, my wife and i also sat down and outlined exactly what is that we want from our life insurance policies if something happened to an example of us.
In short, we’d both want for our family’s lifestyle to change as little as possible. We have four young ones, and my wife stays home with him or her during the day. If she were to pass away, we’d need to replace her efforts aware of someone to watch the kids while I’m at work, help around the house, etc. Thus, even though she doesn’t generate any outside income, she provides significant value to the family and we need for her to get insured.
Likewise, if I were to die, we wouldn’t want on her to suddenly have to go back in work. Therefore, we’d have to completely replace my income for your foreseeable future. We’d also need for the payout to be large enough to cover new expenses like private insurance coverage since our health insurance is currently linked with my job.
How much a life insurance policy do we have?
In the end, we bought a pair of twenty year insurance coverage policies to cover us. We selected two decades because that roughly corresponds to the time at which our kids are going to be out of the house and completely themselves. At that point, our day-to-day responsibilities, as well as our need for life insurance coverage, will drop off dramatically.
In terms of amounts, my policy is worth roughly 20x the wages from my day job. That might sound like a lot, but I also produce a decent amount of self-employment income, so it’s a considerably smaller multiple of my total annual income. In addition, I also have a limited amount of coverage — 3x my annual salary — through my day job. The nice thing about the employer coverage is that it rises with my salary, such that our total coverage will grow slightly over time.
In my wife’s case, we got such a smaller policy, corresponding to roughly one-third of my coverage. As noted above, it’s important for us to have coverage on her, as we’d want to have a very very similar way of life for our family regardless of whether one of us were out of your picture. We’d need to rely on someone else to help with the kids, help keep the house in order, etc. However, since my spouse doesn’t currently generate any outside income, we could possibly get away with less coverage for my child.
Deciding how much life insurance you (or maybe spouse) need is a very individual process. But contemplating what you want your insurance policy to be able to provide, and the expenses you’d should be able to cover, is a great beginning.