Good question to have an answer to and one that does not have a specific answer either. How much life insurance you need is a question specific to the financial dynamics of your life. Consider any debt, obligations, your spouse, business and or kids. Not having a complete picture would generate a generic answer that could be way off from your real needs. Further, everyone’s goals with life insurance are different. Some people will have a defined purpose such as “funeral and burial” expenses.
On this page, I will try to get you thinking about what you need to decide as you are considering the purchase of life insurance for your family.
How To “Dial In” The Right Amount Of Life Insurance
First and foremost, you should never purchase more life insurance than your budget will afford you. People tend to drop coverage if money is tight. At that point, you are uninsured, all peace of mind/certainty is gone because your family and/or business interests are not protected. All the risk is back on the table. Better to buy what you can afford before all else.
Many financial entertainers, financial “gurus,” and even some agents/brokers will tell you 8-10 times your income. Now, we simply don’t agree with that cookie cutter formula.
Why? For starters what is your goal with having life insurance? How many people are you trying to protect? Are the insurance death benefits monies for a legacy, a defined purpose or a combination of both? Are their any special needs involved in the decision making process for the beneficiary?
If you are someone planning for the end of life and just need a final expense or burial type policy, you probably don’t need to leave 10X to your beneficiary.
Typically as we age our financial obligations become lower. The home is paid off, kids are thru college etc. and our paycheck at work has peaked allowing us greater savings and investment opportunities.
What I/we recommend is a complete needs analysis to determine what amount of life insurance is ideal to meet your goal. It is the only way life insurance can be dialed in to accurately determine your specific needs.
With the needs analysis, we (both agent and interested consumer) are determining all the expenses that the policy beneficiary(s) will need for a certain period of time. The needs analysis is the best method I know of for determining how much life insurance is needed.
If you like to get started on your own before speaking to a life insurance professional to help sort out the best life insurance company and policy for your needs, here is a link to a needs analysis worksheet. You can use this to zero in on how much insurance is ideal for your goal rather than following the 8X-10X rule. Just don’t exceed your budget for life insurance once you have gotten your quotation. Some is always better than none.
Here is a fictitious but realistic example to illustrate….a family of 4 with 2 children ages 2 and 4. The parents have a 30 year, $200,000 mortgage on their home with 25 years of remaining payments and revolving credit card bills. They also have college aspirations for their 2 children. Now, Mom stays at home with the kids and is otherwise unemployed since the birth of their first child. The concerned husband (potential life insurance applicant) is worried that if he was killed in a car wreck or died of a medical condition such as a heart attack or cancer, that his family’s future would be difficult at best. His wife would have to go back to work for questionable pay while the kids enter daycare. The kids college fund would not come together so they can attend college without huge loans… if at all. Mom and the kids would also lose the family home nor be able to pay off car loans with his unexpected passing.
So our goal here is to insure his life till his children are at least 21 and the house is paid off which is another 25 years. How much is college going to cost, the mortgage payoff, what is the payoff on the autos and credit card balance(s)? What would his wife need income wise to cover herself, the children till they are young adults including food, clothing, college education, medical and dental expenses? 20 year term life insurance would probably be an appropriate to seriously consider in this case if only temporary coverage is desired.
Incidentally, what if the husband loses his wife, the stay at home mother passes unexpectedly? Breast cancer and car wrecks claim the lives of many young mothers. Don’t kid yourself on these matters!! I’m in my 50’s at this time and have seen plenty of sad things happen to friends and policy owners along the way. I think we all know about car wreck fatalities but I know of many men who lost their wives in their early 40’s to breast cancer. One high school friend of mine of had 4 children with his wife. His wife was a stay at home mother.
Is something like this going to a create financial problem beyond the sorrow the family has with the loss of her life?
You bet it will!
Stay at home parents may not receive a paycheck, but their contributions are worth a lot of money!! Just consider how much a nanny or day care expenses are. Combine this with hiring a cleaning company.
Remember, it is a team effort to raise a family and take care of your home. Life insurance should always be on both parents.
Beyond the monetary basics is some consideration as to the lifestyle you would want your spouse to have in your untimely death. Do you want to financially insure the full financial value of your life to assure the family would be able to live the lifestyle you envisioned? What would have to change in order to move on? How much would that cost per year and how many years would the money be needed?
How Much Life Insurance Do I Need For My Child?
What wishes do you want to provide for your child by purchasing life insurance? How old is your child or are they and adult? Are you planning for final expenses (the inevitable) or the unexpected? Are they going to go to college? 2 or 4 years, graduate, state or private university? Till what age would you like the protection? Add your wishes up. Know the cost of what it is you want to provide. If your budget always, assuming the cost of inflation is going to devalue the coverage over 20 years significantly. Give us a call for help. We will work thru this with you.
How Much Life Insurance Should Person Have in Conclusion?
Remember, life insurance is very affordable when working with an independent life insurance agent/broker that knows how to recommend the right policies and structure the right them the right way to work for you. He or she will understand your specific situation and whom to place your business with.
Make sure you work with an experienced advisor who is open minded and seasoned. This is especially true if your overall health is rocky. The experience of this broker should help sort out your best options for coverage. Getting it right from the beginning is an important step in protecting your family from the terrible financial impact that occurs with the death of a loved one.
How do you know if you have enough life insurance? You’ve done a proper needs analysis either with someone like Special Risk Life or alternatively used the document we’ve provided you. Again, be sure you’re goals are clearly defined and what you can comfortably afford to pay an insurance company to guarantee financial protection for your beneficiary(s).
At Special Risk Life, we are always here to help. Don’t fret if you have been declined for life insurance before. We handle tough cases daily and work with carriers that can make you a good offer. Reach out and contact us today at 269-230-3464 or contact us here.
