How much life insurance do you really need? I’ve wondered this question multiple times through the course of my life. This post will help you answer this exact question.
The key thing to realize is that your life insurance coverage needs change over time. When I was young and single, I didn’t need life insurance beyond my employer provided life insurance equal to 3X my income. But once I had two young children, both my wife and I amped up our coverage.
For years, I had 2X the amount of life insurance coverage as my wife. Once the pandemic hit in early 2020, we realized that not having the same amount of life insurance coverage made no sense.
My Life Insurance Mistake
The reason why I have life insurance is because I have mortgage debt and children. I wanted my policy to at least pay off all of my mortgage debt if I were to pass.
The policy is for 10-years and $1 million in coverage. I took it out on my 35th birthday. However, in retrospect, I regret only getting a 10-year term. If I knew I would have kids when I turned 40 and 43, I would have gotten a 30-year term.
Because of a doctor’s visit to treat my snoring, I was diagnosed with sleep apnea. Due to the diagnosis, when I went to see how much more it would cost to renew my term life policy, the premium went up by multiple fold. Not getting longer term was a big mistake.
“Luckily,” what I can do is convert my term life insurance policy to a universal life insurance policy and keep my safe excellent health rating that I had when I was 35. The issue with a universal life insurance policy is that it costs a lot more every month.
At the moment, I’m doing my best to build as much wealth and pay off as much mortgage debt before my policy expires.
How Much Life Insurance To Get
To determine how much life insurance you really need, I’ll use my own example from back when I was 35. I’ll also share other examples as well to help you better understand the life insurance process. This post will go over:
- When to get life insurance.
- How long of a life insurance term to get.
- How much life insurance to get.
- A sample chart comparing costs based on different amounts and terms.
- Where to get life insurance.
Figuring Out How Much You Really Need
The general recommendation is to get life insurance when you are younger, so you lock in a lower fixed price. Once you have a policy, you can alter your policy based on your changing needs.
But the reality is everything is priced in. Since you’re younger, you’ll pay less per month, but you’ll pay for more years than someone who takes out life insurance at an older age.
As a result, it’s much better to get life insurance once you either take on a lot of debt, have a newborn, or both, instead of by a predetermined age.
Main Questions To Ask Yourself
- Do I have people depending on my income to survive? A non-working spouse, children, and retired parents who need financial support are the most common dependents.
- Will my debt be a burden on those I leave behind? The most common type of debt is mortgage debt. Other important debt to consider is high interest consumer debt. The larger your debt and the smaller your equity, the wiser it is to get coverage.
- Will I die early or before my dependents have a chance to become independent? Males die earlier than females. Meanwhile, if you have a history of health problems, you will likely die earlier than those dependent who are healthier. You know your body the best, even more than the health tests administered to those who get $1M policies or greater.
If you answered “YES” to any of these questions, then you should get term life insurance. Now the question is, for how long and how much?
How Long Should The Term Be?
Given the largest debt for most people is a mortgage, it’s a good idea to match the life insurance term as close as possible to the years remaining on paying off the mortgage.
For example, I’ve got a $960,000 mortgage that has 22 years remaining until it gets paid off based on its amortization schedule. As a result, I took out a $1M, 10-year term policy to cover this debt just in case I die early.
The annual mortgage payment is roughly $53,000 a year ($26,000 goes to principal) along with a whopping $21,000 a year in property taxes and $2,000 a year in home insurance cost.
In other words, if I die, the person who inherits this property will have to pay $76,000 a year to own the house plus inevitable maintenance expenses. That’s a lot of money if you don’t make at least $150,000 gross a year.
The person whom I’m leaving the property to currently does make over $150,000 a year, but one day she might not, and I don’t want my death to have a psychological + financial burden on her.
Another way to think about your duration matching is to think about how long it will take for you to pay off all debt. Given I plan to pay off all debt by the age of 60 (in 22 years), having a 20 year policy is about right.
How Much Life Insurance Do I Really Need?
The final way to determine how much life insurance you need, is to figure out the coverage amount.
Although I have more than $960,000 in debt since I have a couple more properties with mortgages, I’ve decided to just pay for a $1M, 20-year term life insurance policy for the following reasons:
- If the property with a $960,000 mortgage is sold, there is a high probability that there will be greater than a $1,000,000 windfall because the property is worth anywhere between $2,000,000 – $2,800,000.
- The person who inherits the property currently makes over $150,000 a year, and will also inherit my business, which also makes over $150,000 a year. In other words, she has the cash flow to be able to float the property for years.
- I don’t think I’ll die within 10 years, and hopefully not within 20 years either! But that’s what everybody thinks who takes out life insurance. I’ve already decided to pay ~$540 a year for insurance premiums I don’t believe will be used. I’m not sure I’m willing to spend more at this moment. Each year I live, at least $50,000 in debt is automatically paid down.
Update 2021: What’s interesting about this example is that I ended up selling the property with the almost $1 million in mortgage debt. As a result, I don’t have the mortgage debt any longer and my insurance needs have declined. Further, my wealth has growth over time, enabling to self insure. That said, I’m still interested in having some sort of insurance coverage due to having two young kids.
Here are some options for you to consider in terms of how much life insurance to take out.
Most conservative decision:
Take out as much insurance as possible to completely eliminate all debt plus provide money left over to pay for living expenses for the rest of your dependent’s lives. Use a life expectancy of age 100. Take 100 – current age and multiply by annual living expenses e.g. $500,000 debt + 50 years X $100,000 = $5 million term policy.
Take out as much insurance to completely eliminate all debt. Further, provide enough living expenses until the age of 70 when full Social Security benefits get paid e.g. $300,000 debt + 30 years X $80,000 = $2,700,000. Round up and get a $3 million term policy.
Take out as much insurance to eliminate all debt and provide for 5-10 years of living expenses, long enough for your dependents to become independent e.g. $500,000 debt + $100,000 X 10 = $1.5 million term policy.
Least conservative decision:
Take out just enough insurance to make sure any assets inherited don’t become a burden. The life insurance should give the recipient enough time to decide what is best to do with the receiving assets. This is my case where the recipient of my house can decide to live in the house, rent out the house, or sell the house to extract the equity.
Of course, the riskiest decision of all is to not take out any life insurance when you have dependents and debt. Even if you don’t have debt, having a term life policy is important for income purposes.
If you have no debt and no dependents, then getting an insurance policy is probably a waste of money unless you feel you have a greater chance than normal you’ll die before the people you care about and want to provide income for them.
Check out the chart I put together based on how much each life insurance policy would cost by term and amount. Also see my post on how much life insurance costs by age and gender.
The Most Common Type Of Life Insurance Policy
Based on my conversation with various insurance companies, the most common policy is a term life insurance policy for 25 years and $250,000.
That makes a lot of sense given what we know about median household income and median net worth is around $50,000 and $80,000, respectively. Twenty-five years also should be enough to cover the expenses of raising a child from birth to adulthood.
If you ever want to get some motivation to live a healthier life, speak to a life insurance agent.
What The Insurance Company Will Ask
- History of significant medical conditions, cancer, diabetes, heart disease with you or your immediate family.
- Whether you’ve used tobacco or other substance abuse products in the past 12 months.
- How much alcohol you drink a week.
- Whether your mother or father have died before 60 due to cancer or cardiovascular disease.
- Your cholesterol and blood pressure. You’ll have to go for a physical at an approved medical center to get your blood work etc. Or, they’ll come to you.
One of the things you can do with a term life insurance policy is to convert it to a permanent life insurance policy in case you change your mind. A permanent life policy is much more expensive because you are also paying to build up your cash value along with paying for the death benefit. Just know that conversion is an option for many term life policies.
You can learn about all the life insurance options here. I’ve spent a tremendous amount of time researching them all to fit different needs for different families.
Best Place To Get Life Insurance
Thinking about death is always a sobering topic. However, knowing that my loved ones will not only get my assets, but a nice $1,000,000 tax-free check from my insurance company really makes my day. Getting life insurance really does help the psyche.
One of the easiest places to get multiple, custom term life insurance policy quotes in one place is PolicyGenius. PolicyGenius does the leg work for you and lets you make the most informed decision possible. Because life insurance prices are regulated, you should use a tool to help you compare costs easily.
Just in case my wife and I pass prematurely and can no longer generate income for our children before they become adults, we need a solid life insurance policy to make sure all their medical costs and education costs are covered. Children are expensive, especially if you choose to live in an expensive city like we do.
Life insurance is a gift of love and a selfless act of kindness. And we love our children so very much!
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