How Much Life Insurance Do You Really need
Ok, I got life insurance but I worry, is it enough?
One of the most frequently asked questions I get as a financial coach is, “How much life insurance do I need?” There’s a ton of information out there; a lot of it is confusing and even conflicting. But it doesn’t have to be.
Deciding how much life insurance you need starts with the following:
Understand the #1 purpose of life insurance
Decide if you even need life insurance
Use the rules of thumb and the D.I.M.E method to help you figure out how much life insurance you may need.
Choose which type of Insurance you’ll use
Understand The #1 purpose of life insurance
The #1 purpose for life insurance is to make sure the people you leave behind will be financially secure. They will have food, shelter, and clothing, and they will not have to give up their quality of life.
Decide if you even need life insurance.
A rule of thumb is that you may need life insurance if:
Someone is financially dependent on you
If you do not have enough money to cover final expenses
Use Rules of Thumb and the D.I.M.E Method to help you figure out how much life insurance you may need
If you need insurance, below are general rules to help you figure out what life insurance you may need.
No one dependent on your income (empty nester, single, no kids): Enough to pay for final expenses if you don’t have enough savings or enough assets to cover your final expenses.
You have people dependent on your income: 10x your income in life insurance.
Consider these rules of thumb as starting points. Consider going deeper and using the D.I.M.E method to think through precisely what expenses you want to be covered if you pass away prematurely.
The acronym D.I.M.E. stands for:
Debt and Final Expenses:
This number includes non-mortgage debts and a guestimate of final funeral expenses. The average cost of a funeral is about $7,000 to $9,000.
Income:
Decide how long your family will need your income. Next, multiply that number by your annual income.
Mortgage:
Look at either your mortgage statement or your online mortgage information for the amount needed to pay off your mortgage.
Education:
Use college savings calculators to estimate total college education costs for your children.
Once you have each D.I.M.E number, add them together. You’ll have a much better idea of how much money you may need.
Next, subtract your D.I.M.E total from life insurance benefits, insurance benefits that pay off debts, assets that will be sold if you die, money saved to cover expenses, etc.
This gives you a more specific idea of how much additional insurance you may or may not need.
You can also use LifeHappens.org’s Life Insurance Needs Calculator to walk through expenses you want to cover if you or your spouse dies prematurely.
CHOOSE WHICH TYPE OF LIFE INSURANCE YOU’LL USE
Once you have determined how much you need, the next step is to purchase insurance. Life insurance falls into three broad categories- whole, term, and group.
Whole life insurance.
The policy lasts as long as your premiums are paid. Some whole life policies allow you to build cash value. Other policies have an investment component.
Term insurance
Insurance for a set period. It can be as short as ten years or longer than 30. Many policies allow you to renew coverage.
Group life insurance
Available as an employee benefit that generally lasts as long as you work at that company. Some employers give you the option to keep your life insurance benefit if you leave the company. Check with your employer.
There are ongoing battles as to which insurance is better. I believe there is value to all types of insurance. General rules of thumb for picking insurance:
Permanent Insurance
If you feel you will have someone dependent on your income for the rest of your life and you won’t have assets to pass along, then permanent insurance may be considered. An example is a need for money to support a special needs child or relative.
Term Insurance.
If you have children dependent on your family’s income for only a specific time, then a rule of thumb is you may consider that term insurance. The guidance is to get enough term insurance coverage to match the length of time your child may be dependent on your income.
For most people, it’s getting enough coverage to last until their last child graduates from college. Most people will have assets (home, 401k, investments) that they will eventually pass along to their children.
No Insurance.
Suppose no one depends on your income (empty nester or single with no kids). In that case, consideration is to make sure you either have enough assets to pay for final expenses (burials, debts, etc.) or get enough insurance to cover final costs.
Employer-Provided Insurance.
This type of insurance may be cheaper than insurance you get on your own. It may be a slightly easier process to qualify for insurance. If your employer allows you to keep your coverage if you leave, sometimes called portable coverage, even better. Contact your employer for more information.
Recap of the steps to determine how much insurance you need:
Understand the #1 purpose of life insurance
Decide if you even need life insurance
Use rules of thumb and the D.I.M.E method to determine how much life insurance you need
Choose which type of Insurance you’ll use
Life insurance is not about the person buying the policy; it’s about the people left behind. It’s making sure that those who love won’t financially suffer if you pass away. Review and, if needed, get additional coverage to protect your family’s financial security.
Next Steps
List all assets you’ll leave to your family if you or your spouse pass away. This includes all life insurance policies, retirement plans, savings, and insurance that pays off debt (mortgage, credit, etc.)
Use LifeHappens Life Insurance Needs Calculator to determine how much insurance you need.
Either contact where you already have insurance, review your workplace benefits (if you can take the benefit with you if you leave your job) or go online to increase your coverage if needed.
Bonus: Go a step further and get the rest of your family’s estate plan in order
