It’s common to hear people of all ages in different stages of life asking, “Do I need life insurance?” or, “How much life insurance do I need?” And frankly, these are fantastic questions to be asking, especially when you have other important people your life to worry about.
No one likes talking about the possibility of passing, but failing to address the reality that life is finite can leave your loved ones unprotected. By taking a few minutes to evaluate your situation and make meaningful decisions now, you can put this issue to rest.
What is the right amount of life insurance coverage?
Answering “how much insurance do I need?” or “how much term life insurance do I need?” can be tricky at first because there are many different factors that go into making the right decision. But if you take your time, utilize honest assessments and weigh all your options, the right answers become clear.
1. Gather information about your situation. Start by writing down all the factors that may be important to your decision. Include things like your age, health, family health risks, debts, assets, number of beneficiaries, cost of living and any other pertinent information.
2. Begin calculating your beneficiaries’ financial needs. If you were to pass, how much money would your family members need? How much money would they need to cover all debts, expenses, funeral costs and anything else they would need immediately and in the future?
3. Start comparing coverage ranges with costs. The next step is to start looking at different policy options and ranges. Look at what is covered, the amount of benefit, and how much it would cost in premiums.
For someone early in life in their 20’s who is married without kids or much debt, you might not need more than a few hundred thousand dollars of coverage. You only have one beneficiary who is still young and capable of earning a living on their own.
As you get older into your late 20’s, 30’s and 40’s, you may start to have kids (or more kids). Additionally, you may accumulate more debt obligations. In these situations, you may end up needing more than just a few hundred thousand dollars.
As you approach retirement and your loved ones may not be able to work, the amount you need could go up into the high six or seven-figure range.
Calculate your baseline coverage
Figuring out just how much life insurance you need starts with determining the financial obligations you are responsible for and the life factors that weigh on this decision.
Dependent and beneficiaries
Start the process by figuring out who you’re responsible for financially. For some people, it might just be your spouse. For others, that may include kids, parents, grandparents or others in more unique situations. You’ll need to calculate the amount required for each of these dependents individually and then add them up to get the total amount you need a policy for.
The main reason for getting the best life insurance policy is ensuring that the people you love have their expenses covered. Now, this is where you’ll have to answer some tougher questions. What do they need, and what can they live without? How long will they need assistance? Are they able to gradually get back into the workforce to cover the costs of expenses?
None of these questions are fun to answer, but it’s important to be realistic. Ideally, we’d love to be able to cover 100% of our loved one’s necessary and discretionary expenses. However, that means an extremely high insurance premium, which might not be in the budget.
In most cases, when you pass away, your debt doesn’t just go away. Creditors may start to come after your family members for repayment of the money that you borrowed. Leaving loved ones with a pile of debt is not ideal, especially if they have to rebuild their lives — emotionally and financially. Look at what debt you have and what debt your loved ones have. Do you want them to be able to pay it all off immediately, or do you just want to cover the cost of payments for a period of time?
Final arrangements can be expensive. According to the Federal Trade Commission (FTC), a casket alone can cost upwards of $2,000. Unless you’ve made prior arrangements, funeral costs can be a major expense that your family is not ready to handle. When figuring out how much life insurance you need, make sure to calculate funds for your funeral costs. Much like debt, you don’t want your family and loved ones behind the financial curve because of final expenses after you pass.
Once you calculate the base coverage that you need, it’s time to look at additional factors that you may want to consider. Some of these factors involve things like quality of life for your beneficiaries, likelihood of passing and premium costs.
Quality of life
Covering the must-pay expenses and debts is the first step in figuring out how large an insurance policy you need. You also want to consider the quality of life you want your family to have. Are there additional expenses or luxury items that you want them to be able to afford? Are there things you did together you want your spouse or kids to be able to carry on after you pass? Talking to your beneficiaries about these things might be a necessary part of this process.
Are you an older individual close to retirement? Do you want to make sure your spouse or beneficiary doesn’t have to go back to work if you pass? Weighing things like cost of living, expected retirement age and quality of life are important factors to consider, especially as you get closer to the age of retirement.
Age and health
While no one can tell what tomorrow brings, you can intelligently look at how your age and health might increase or decrease your risk of passing. If you’re young and relatively healthy, you’re probably less likely to pass. If you’re older or have extensive health problems, statistics say you may be more likely to pass. Again, no one can predict what tomorrow may bring, but weighing risk vs. benefit vs. cost is an essential step of the life insurance process.
Outside of your age and health, you need to look at any outside factors that might affect your risk. Do you work a dangerous job? Do you live in a dangerous area? Does your family have hereditary health risks you may be subject to? All of these things need to be considered during the decision-making process.
Look for important riders
The term rider refers to an enhancement or added feature that you can add to your life insurance policy. Riders help you take a generic policy and add in the elements that you need to customize to make the benefits the most appropriate for your situation.
When you’re shopping for a policy, take the time to see what options are available. Some of the more common riders to consider include:
- Accidental death rider – This rider pays out additional money if you pass in an accident. This might be best for younger people who are less likely to pass from natural causes anytime soon.
- Family income rider – With this, your family will be paid a steady flow of income for an agreed-upon number of years after you pass. If you’re worried about the management of funds after you pass, this could be a positive addition to a life insurance policy.
- Accelerated death benefit – This rider can give the policyholder access to part of their policy while still alive if they become terminally ill. It’s crucial to see what does and does not qualify before adding this rider. Additionally, this rider may be included at no additional cost with some policies.
The key to getting the best life insurance policy for you and your family is shopping around. With so many options, riders, factors, costs and decisions to consider, it should come as no surprise that every policy is going to be a little or a lot different. Each company looks at and weighs things differently.
Start the process by determining what you’re looking for. Know roughly the amount of coverage you want, what you’re able to to pay and what riders you might be interested in. Additionally, know what factors you’re willing to bend a little on and what elements would be deal-breakers.
From there, find the providers that offer what you want. Begin reaching out to agents to gauge costs, coverage and availability of the options you want. Additionally, take a little time to research the companies themselves. Is the company reputable? Has the company been in business for a long time? Does the company have a good track record of taking care of its customers?
While it might be tempting to go with a less-reputable company to save money, it could leave your family holding the bag when you pass. The reason you’re getting a policy is to protect them. Make sure you do your due diligence now to protect them when you’re not around.
Who might not need life insurance
Young people with no beneficiaries
If you’re young and are unmarried without kids, you might not necessarily need to get life insurance. The purpose of life insurance is to protect your loved ones financially when you pass. If you don’t have anyone that needs your financial help, you may be able to save by passing on life insurance.
People with no beneficiaries
Even if you aren’t young, if you don’t have any beneficiaries that depend on you financially, then you might not need life insurance. One caveat to pay attention to here is how much debt you have. Remember, when you pass, your creditors may try and go after your loved ones for that debt. Just because these people don’t depend on you financially from day to day, you might still have obligations you want them to be able to take care of for you.
Life insurance provides the funds your loved ones need to cover costs after you pass. If you already have extensive savings and little debt, you might not need to get life insurance. Instead, you may just need a will that properly allocates your funds to your beneficiaries to cover costs.
Make sure, though, that you do an honest assessment of how much money your loved ones need. Even if they have enough money to make it for the next few years, that might not be enough to help them for as long as they need it. This can be especially important when looking at beneficiaries that are older or near retirement age.