Family matters: How much life insurance should I carry?

When it comes to securing life insurance, many consumers have no idea how much they need to protect themselves and their families. In fact, there’s a lot of confusion regarding the value provided by life insurance in terms of financial protection.

In a recent U.S. survey by the Association for Advanced Life Underwriting, about half of respondents confirmed that they think life insurance is relevant to their financial needs. However, 37% also said they don’t think they need it, and another 25% were unsure about its overall importance.

The truth is that none of us like thinking about the repercussions of our deaths. But that’s the wrong way to view life insurance. Instead, it should provide a sense of peace that your family will have financial protection in your absence.

Thinking ahead should bring calm and confidence

With that in mind, here are some guidelines for determining how much insurance is appropriate for your needs.

Know the difference between term life and whole life insurance

Term life generally lasts while you are benefit-eligible when purchased through an employer, or for 10 to 30 years when purchased individually. Many employers offer portability and conversion to take the coverage with you if you leave or retire. Employees can check with their Benefit Departments for continuation options available. Term life insurance provides straightforward and (usually) affordable coverage over an interval of time. Term life can help you regardless of your age. Whole life is typically six to 10 times more expensive because it is structured to do more than just provide a death benefit, like term insurance. Whole life may allow you to communicate cash value to be used to pay premiums in the future or even help with retirement savings.

Understand the formula

In general, determining the amount of life insurance you need requires adding up your after-tax income and liquid assets, then subtracting your debts and routine expenses — food, housing, child care, tuition, transportation, medical costs, etc. The remainder leaves the “coverage gap” that should be covered by insurance. It is suggested that at a minimum your policy should pay off all your debts, including interest, and replace your current income with enough added on to hedge against inflation. Another solid rule of thumb is to purchase insurance worth 10 to 15 times your annual income. If coverage is provided through an employer, employees can check with their Benefits Department for a needs calculator; many carriers offer this handy tool.

Further customize your policy

In anticipation of future costs, specialists recommend adding several thousand dollars of insurance for each of your dependent children, for future college tuition and for each aging parent you're helping to support — a total that may amount to several hundred thousand dollars.

You’re never too old

The idea that some people are too old to secure life insurance is a myth. Younger people are subject to lower premiums, but policies are still available to older people in higher-risk categories. You’ll likely need less coverage as you age, since you’ll probably have less debt and fewer dependents to support.

Your workplace may offer optimal rates

One benefit of employers offering life insurance is that they can secure better prices by purchasing as a group. Many people like to take advantage of this value and purchase additional supplemental coverage on their own, to give their families even more security. For convenience, payroll deductions are typically available when coverage is purchased through an employer.

Have additional questions about how life insurance can benefit your group or your clients? Call 651-665-3789 or email to have a discussion with the experts at Ochs.


DOFU 3-2020