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 figure out how much life insurance to get to protect yourself and your dependents.
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.
We were both equal providers and caretakers. Thankfully, my wife as about to double her coverage to match mine for less money using PolicyGenius.
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.
Thankfully, at the end of 2021, I was able to get a new affordable term life insurance policy with PolicyGenius! I used PolicyGenius to shop around for a no-medical exam policy. I hate needles.
PolicyGenius found me a carrier called SBLI who were willing to insure me for $750,000 for 20 years for a $114. Before finding these guys, I was getting quotes for $450+! With two young children, now I can rest easier for the next 20 years.
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.
More Considerations On How Much Life Insurance To Get
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. And if you're trying to overcome your frugalness because you don't want to pay health care premiums, learn how to get life insurance for free. My post will help you understand how life insurance is a good value the more you make.
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!
More life insurance posts: The Best Age To Get Life Insurance
59 thoughts on “How Much Life Insurance Do I Really Need?”
My employer provides great supplemental life insurance (1M, 100K for spousal, etc.) for around $10 a month. I plan to be there for a long time—should I consider term life insurance in addition to what they offer? I have mortgage debt and a kid.
Thanks for explaining that life insurance providers may ask about how much alcohol or tobacco we use. I was catching up with my sister this morning and learned that she wants to shop for life insurance so she can feel more confident about her daughter’s future. I’ll send her this article to give her a better idea of what to expect from meeting with life insurance services soon!
One important point about having life insurance from your employer: if you become ill and can no longer work, you will likely lose the life insurance provided by your employer and face much higher premiums due to your illness when you look for life insurance.
My advice: disconnect life insurance from your employment. Get your own term life insurance and think of the employer provided insurance as a nice extra.
I am glad you mentioned that the general recommendation is to get life insurance when you are younger, so you lock in a lower fixed price. I am thinking of getting life insurance for myself along with the rest of my family. I appreciate the information on how much insurance someone needs.
Here are some useful tips for figuring out how much life insurance you need. How much annual income would your loved ones need to maintain their lifestyle if you died tomorrow?
Consider the cost of all the things they’ll need — clothing, food, utilities, school fees, children’s activities, transportation, home maintenance, child care, health care, insurance and other expenses.
Now subtract income they would get from other sources, such as your spouse or partner. Then multiply the result by a factor based on the number of years they would need the income, advises the LIFE Foundation:
For 10 years, multiply the figure by 8.8
15 years, multiply by 12.4
20 years, multiply by 15.4
25 years, multiply by 18.1
30 years, multiply by 20.4
Multiplying by the factor helps you estimate the amount of capital you need today to meet future needs, the foundation says. The factors are based on an annual 6 percent investment return and annual 3 percent inflation rate for living expenses.
Also, account for long-term financial needs.
Estimate the cost of any long-term expenses, such as the cost of college for your children.
The average price of education varies widely by school. The average annual cost of tuition and fees for the 2016-17 school year was $33,480 at private colleges, $9,650 for in-state students at public colleges and $24,930 for out-of-state students at state universities, according to The College Board. Keep in mind that those are “sticker prices.” Many students pay less because of financial aid. Still, the cost of an education has escalated, and chances are the price of putting your kids through school will continue to go up. The College Board’s website features more information about college costs and what to expect.
The Life Foundation recommends multiplying the total estimated college cost by a factor associated with the number of years before your children attend college. The factors are based on an annual 6 percent return on investment and 5 percent annual inflation rate for college costs. The factors are:
.95 for five years before college
.91 for 10 years before college
.86 for 15 years before college
.82 for 20 years before college
Next, figure out your funeral expenses.
The national median cost of a funeral with viewing and burial in 2014 was $7,181, not including the cost for the cemetery, marker, crematory fees or flowers, according to the National Funeral Directors Association.
Other final expenses include your uncovered medical bills and estate-settlement fees. Typically your final expenses will be about $15,000 or 4 percent of your estate, the LIFE Foundation, an insurance industry group, says.
Next, add up your debts.
How much do you owe?
Removing the debt load will enable your family to breathe easier when you’re no longer around to help shoulder the burden.
Total up all your outstanding debt, including:
Credit card balances
Private student loans
Home equity loans
Add all of those expenses together and subtract it from the financial resources your family would have to mitigate those, such as savings or other life insurance policies. This will give you a very good idea of how much life insurance you need.
I’m glad that my insurance agent was very helpful with me getting life insurance. He walked me through all of the steps, told me how much he though I would need, and did everything he could to make sure that I could afford it. Check him out!
One thing that life insurance might have to cover is medical expenses. If you were fighting cancer for 8 years before your death (and not working during that time) you might be leaving a significant financial burden for your spouse/ Dependants. Medical expenses of this nature bankrupt many families.
Most people fail to recognize some important factors.
1.) We are healthier when we are younger. You are not guaranteed to be insurable as we age. Health conditions arise. I bet every person aged 40 or over reading this, knows someone who has been diagnosed or passed away from a disease such as cancer. If you have a heart attack, stroke, ALS, Azheimers, or cancer you will not be insurable.
2.) Almost everyone puts on weight as we age. Weight plays a factor in the cost of life insurance and you will pay more for it if you are over certain weights.
3.) Life insurance beneficiaries receive the money tax free unless it is paid out in installments. Then only, the interest is taxable.
Let me give some examples.
Person A buys a 500k 30 year term policy at age 33.
Person B buys a 500k 20 year term policy at age 43.
Person C buys a 500k 10 year term policy at age 53.
Question: Who paid the most for their coverage?
Answer: Person A
Person A paid 13,320 and was covered ages 33 – 63
Person B paid 11,280 and was covered ages 43 – 63
Person C paid 12,840 and was covered ages 53 – 63
However, Person A had coverage for 10 years longer than Person B and only paid 2,040 more (204 per year).
Person A had coverage for 20 years longer than Person C and only paid 480 more. (24 per year)
If there is anyone reading this post that doesn’t believe it is worth buying a term policy at age 33 and paying an extra 204 per year (Person A vs. Person B) or paying an extra 24 per year (Person C) for 500K worth of life insurance then there is no discussion to be had. The math is
simple and proves it is much wiser to purchase term insurance when we are younger.
Yes, I sell life insurance but the facts are indisputable. I had several potential clients delay their application process in the last 2 months. In that short time, 3 of them became uninsurable due to health events that happened within that time frame.
Sam, I think for your poll, the breakdown should be $500, $1K, $2K, $5K, $10K, etc. I spend $32K a year on life insurance. Most of those premiums are for whole life insurance. I think of it as a no-risk investment with an internal rate of return of 5% tax-free. That’s like having a savings account that earns 8%. It really is the best thing since sliced bread that most people don’t know about.
As a CPA and financial planner, I deal with the public and interview hundreds of clients a year. Most of my clients are engineers in the SF bay area with above average incomes (~$300K household), who can afford to pay me for professional advice so they’re all smart people but almost none of them are well educated about life insurance.
I think people should have 20x their income in life insurance. If you’re 45 years old and plan on retiring at age 65, you’re going to be working another 20 years so your insurance policy should be big enough to provide 20 years of income to your spouse. The most coverage I’ve seen a company offer to its employees is Google (3x salary free, 10x supplemental). The other major tech companies in silicon valley offer 5-10x salary of insurance.
Love this post due to the fact that it’s very informative. The earlier you decide to get life insurance the better it is not only for your dependents, but for your wallet. Everyone is perfectly healthy until the day before their personal doctor diagnosis them with something. Term insurance is a great product to help address all of your concerns but I feel like a permanent policy establishes more value. Having a permanent policy that has tax-free cash value is a great way to hide your money away from Uncle Sam since it allows you to manipulate your tax bracket once you decide to retire. You can also use that cash value to fund your child’s college education or whatever it may be that they decide to do on a tax-free basis. Everyone’s situation is different, but it is great to have something better than nothing.
Great article – I just read your comment about whole life and could not agree with you more.
Here’s another myth I’m sick of hearing…
Well the “buy term and invest the difference” strategy only works if people actually do it. Most people will buy term and pocket the difference, so they’d be better off buying whole life, since it’s somewhat of a forced savings plan.
That’s the gist.
But you could make that same argument for any investment strategy on earth.
ETF’s don’t work because you might not actually add money to them. 401K’s and IRA’s are poor tax favored plans because who will actually invest in them regularly?
Lord, what a bunch of baloney.
I didn’t want to spam your comments, but email me if you’re interested in a term vs. whole life calculator I recently published. It basically proves that 99% of the time, you come out ahead if you buy term and invest the difference.
Great article. Curious…. What are your thoughts on whole life insurance? The thought is to have a piece of my portfolio work for me in a conservative basis while having insurance to pass to my kids. I pay $300 a month and already max out 401k while investing in rental properties. The theory behind tthe policy is to max it out and it will pay for itself after 20 years. It is insured tbrough northwestern mutual
I would max out all retirement account (and have a decent amount of non-qualified cash and other investments) before putting money into insurance. It sounds like you are doing that. I personally would put money into a UL or VUL if you are looking for growth, as they are a lot more flexible than Whole Life. If you are looking for something to equate to a bond portfolio, then WL could be an option. However, with interest rates being so low, now may not be the greatest time to get a WL policy. Really, permanent insurance can be great for certain circumstances, but are wasteful in other circumstances.
I used to sell life insurance, as well as other financial products (mutual fnds, LTC, etc), in my younger days. I wanted to be more of the CFP type, but alas I was better at understanding the products than actually selling them.
One thing to note is that agents at companies like NW Mutual get much bigger commissions on non-term life products than on term products. I remember it was something like 100% of the first year premium on WL and UL products, 90% on VULs, 40% on term policies (15+ years), and like 25% on 10 year term products. If you add in a typical 40% bonus, the agent selling the $300/month policy to Allen is making $5040 on that sale. Not too shabby if you are the agent, but those commissions could go into your pocket if you learn about the product and get a policy direct, rather than through an agent.
Very timely post. With a kid on the way, I was researching varies life insurances.
Gen Y Finance Guy asked the question I was going to ask as to your opinion on whole life insurance. Any particular reason you don’t care for it? I know you said it was a suboptimal allocation of capital, but I wondered if you had deeper thoughts about it. Why is it subpar?
Whole life is certainly more expensive, but has some pretty good investment and lending components as well. For those who don’t know (anyone reading this site is probably pretty knowledgeable on the subject), you can borrow from your policy without touching your credit, earn dividends if it’s a participating policy, pay it off in full early, and even receive the full death benefit while still alive if you make it past age 100. Plus, the death benefit becomes part of your net worth, which is nice.
If anyone does decide to do a whole life policy, I just have two pieces of advice:
1) Please consult with a tax advisor in regards to estate tax. I believe the government swoops in and starts rifling through your still-warm corpse’s pockets when your net worth exceeds $1,000,000. Sounds like a lot and sounds like money you don’t have, but your whole life policy’s death benefit is part of your net worth. If you have a middle class person with a $500,000 policy and a $400,000 house, then that’s almost it right there. Throw in a $100,000 401k and whatever’s in the checking account and now Uncle Sam thinks you’re Donald Trump. So be careful of the estate taxes.
2) I know I mentioned the investment components before, but please don’t buy a policy simply because of that stuff. Remember that a life insurance product is best used as insurance, not an investment. This may sound obvious, but I had a young twenty something at my desk a month or so ago who I was trying to do an investment referral for. He didn’t want to because he already invests–because he has a whole life insurance policy! He has no wife, no kids, and lives at home with his parents. I don’t understand how an agent actually sat there and sold this kid a policy! Even if it was a variable insurance policy with all the mutual funds, it’s still crazy! Who the hell is he insuring!? So while “life insurance is insurance” might SOUND obvious, it’s apparently not.
Again, I’m curious to know more about what you think of whole life, Sam.
ARB–Angry Retail Banker
Estate taxes apply at the Federal level after $5.4 million ($10.8m if married and the correct steps are taken), so many FI people are well within that range and need not worry too much about the Federal government taking a cut. (IRS: . It’s the state governments you have to watch our for. Many begin exemptions at the $1 million mark (like ARB stated above), with New Jersey beginning at only $675k. The exemption means the cutoff for when an estate tax return is required to be filed for determination if tax is owed or not (can still be above the limit and not owe taxes).
This is a very relevant post and glad you took the time to cover it! One point to add to the mix is that many people rely heavily on their workplace life insurance policy. Considering the median millennial tenure at a job is around 3 years, I think one should be very wary of thinking that’s going to be good for the long haul. Most employer sponsored life insurance policies aren’t transferable and end when your employment does. Outside of the tech sector, benefit programs are shrinking and life insurance offerings may be dropped at any point without an employee’s voice in the matter.
It may be a conservative approach but i think for those in their 20s yet to have others counting on them it is worth considering locking in a 30 year rate at a deep discount due to age. Ten years down the road when a spouse, children, mortage(s), etc… are all potentially in the mix you’ll look at the premium discount as significant along with the fact that you won’t have to worry about if underwriting guidelines are such that you may no longer be insurable.
Thanks for taking the time to put this together Sam. Life insurance is one of those products that is misunderstood by many and can be a huge sunk cost if you don’t carefully evaluate your decision and determine if it is even necessary. That’s about as comprehensive and helpful of an article on the topic I have ever seen, so I’ll be referring back to this one day when I contemplate the decision in the future. Life Insurance providers sell you on the cheap “premiums” for a large benefit, at least that has always been my experience. But I have always refrained since I don’t have any debt that would burden others if I were to pass away. Now that will change once I get married in May and we eventually buy a house. Since we will make the purchase decision with both of our salaries in mind, I’ll probably get some sort of a policy to cover my portion in the event something were to happen to me. But until then, I’ll just stick to my employers offer of 1X salary and call it a day.
Bert, One of the Dividend Diplomats
Hey Sam – Have you written anything on Whole Life Insurance?
I have been researching it a lot lately, and would be interested to get your take on it.
I know it is front loaded with fees, but if it is set up the right way to maximize cash value and minimize the death benefit (the agent takes a 70% + hair cut on thier commission) it seems like a great wealth preservation and tax efficiency vehicle.
The unteruppted compounding is interesting as well.
Anyways let me know if you have written anything.
I haven’t, b/c I think they are a suboptimal way to allocate capital. It’s like buying a BMW watch. Just buy a BMW car, and focus on buying a watch by a traditional watch maker :)
If you have any interest in writing a post about whole life insurance to publish on FS, I welcome it! Maybe there is a good angle you can look at.
I still have some work to do formulating my own thoughts on the matter. But if I think I have something interesting enough to send your way I will.
I have a small whole life policy that is basically my panic-room type policy to cover my funeral expenses for my wife and child if I died and everything else had fallen apart years down the road. I’d have to look it up but its dividend is like 3 or 4%. We have term and group life to cover the issues Sam is mentioning in his post.
I also wish I had kept my old universal life policy from when I was a child in the 80s. Those policies were great if you funded them to the max and most had a guaranteed rate of at least 4% (some much higher).
I really wouldn’t be looking to fund a life insurance policy unless you are already maxing out retirement accounts and saving a bunch elsewhere, but they can reasonably address some specific needs if set up correctly (most are NOT set up correctly).
Thank you for the info on the term life insurance as I have been in the early stages of looking to purchase the right life insurance for my family. I know that there are other products like universal and whole life insurance but i am not sure how they are different from the term life insurance. Do I want to stay away from the whole and universal life insurance? What are your thoughts about the universal index life insurance which tracks the S&P 500? I have heard that the cash value continues to go up even during the times S&P 500 has a negative return, but it also has a limit on the upside as well.
Just wanted to get your unbiased opinion on the different life insurance options before making any decisions.
Yes, stay away since their fees are excessive. If you want to invest in the S&P 500, either buy some S&P 500 ETFs like SPY in your brokerage account, or allocate capital every month into a low cost algorithmic advisor like Wealthfront.The first $10,000 managed is free, and they charge 0.25% to manage your money for every dollar after. Or, you can build your own diversified portfolio for cheap.
Check out the proper asset allocation of stocks and bonds by age.
It’s usually best and most cost effective NOT to use life insurance as a savings vehicle (whole life, universal life, etc.)
Just get a term life policy for the years you need covered and the same premium each year.
I have a $500K/20YR policy that costs me $21 a month. I plan on being “self insured” by the time this expires, however I may pick up another 20YR 500K policy at the 10 YR mark (3 years away) just to be conservative.
Another group of people who should have life insurance is stay at home parents. If Mrs. C. were to pass away it would be very costly for me to hire people to replace her roles. We have 2 kids who are under school age and 2 other kids who are in school. Right now we have a $250K policy on her.
Very timely post for me. I reviewed my benefits this week and thought about debt elimination for my wife, child and future children if I were deceased. I will re-evaluate to consider some income supplement in addition to debt(mortgage) elimination. Thanks!
No problem! I’d consider getting coverage that supports your kids up to 22 and pays off all debts.
Add me to the none. Single with no kids. And if I were to get married tomorrow then die the next day my spouse would get about 25% of my pay as a pension. But I have no spouse so my family (parents and a sister) would inherit a nice amount of cash once everything was liquidated.
I have about 13x my current salary – a small amount of which is covered by work. But I consider work insurance as a luxury and never want to count on it. Work could cancel it, and if I am un-insureable, then I’m stuck. We carry sufficient on my wife to cover for caretakers for the children for a while. I prefer us to be over-insured rather than under-insured. So actually, I may need to up my amount a bit.
We both have a blend of term and permanent and I typically move a portion of my term to permanent every other year or so.
I’ve never heard of 13X salary provided by work as an option. Good benefits! Mine was 6X max I believe, then I’d have to get outside insurance.
Work only covers about 1.5. I pay the rest.
Why is life insurance needed when your net worth is so great? Life insurance makes a lot of sense when you have dependents who are relying on your income. But it sounds like you have your investments income at a rate higher than living expenses.
I have always thought of life insurance as more valuable to people whose income is critical for dependents (ie not financially independent yet).
Fun in the sun, Some people with high net worth use life insurance to cover inheritance taxes. It’s a relatively inexpensive way to ensure your entire estate gets passed on.
Because nothing in life is guaranteed except each present second that passes.
Do you not have life insurance?
No, I do not have any life insurance. I plan on having kids within the next few years, and at that point may consider life insurance should dependent costs (through to 22) outweigh my assets. At this stage, I am getting closer to financial independence, so don’t see a need for life insurance. If I die, I want my dependents to be financially secure (personally I see that at about $1 mill per dependent).
I don’t see any value in paying for a windfall any greater should I die. I would like my kids to be able to get the best education money can buy through to end of college. However after that, they are on their own in building their life. People who are wealthy and feel they had an input to that success seem happier to me, than those who can live off their parents / financial windfall.
I had to start paying for my own life insurance this year when I no longer got benefits from my old employer. When I had it through my employer it was free and covered 2.5 times annual salary.
Signing up for my own policy wasn’t too bad of a process. I had to answer some basic questions over the phone and then a nurse came to my house that week to do some standard screening tests. I had to wait roughly 3 weeks I think before the underwriting process completed. It feels good to have life insurance!
Yes it does! It feels so good, that I plan to get more :) Writing out these posts definitely helps make me come to better, more congruent decisions. I hope everyone spends time to review their policies before year end.
I’ve kept my life insurance policy term short (10 years) because inflation eats into the payout. (I’d do a 5 year term but oddly enough the premiums are greater than for a 10 year term, holding the payout constant.) For example, if I purchase a $1m 30 year term policy and die 20 years after purchase of the policy, the payout has a PV earnings power of $514k at time of death, assuming a 2% inflation rate. I’ll just get a new policy right before expiration of the existing one.
This makes sense for us because debt-elimination is not our primary objective, since we are a single income family with a baby and toddler. If I die, investment income/principle preservation will be the objective.
Excellent point about inflation eating into payout. Although, every time you re-up, they will get you with higher premiums. There’s not free lunch.
“I’ll just get a new policy right before expiration of the existing one.”
What if you are un-insurable then?
My healthy husband developed high blood pressure after we took out term life insurance. It is totally controlled with a daily pill but I think it would put him in a more expensive insurance pool – not uninsurable by any means, but no longer the cheapest rate.
Thanks for sharing. Everything is a calculated risk, and the older we get, the more bad things happen. It’s just the way it is. Pay now, or pay later.
Thanks for the kick in the pants, Sam.
Now that I’m married with kids, I’ve been meaning to increase my life insurance but haven’t quite gotten around to it yet. While I have a 2x salary policy from my employer, even assuming that applied at my passing, it would barely cover the remaining debt on my mortgage and not provide anything for raising the kids.
I sense a blood pressure and cholesterol check in my future!
Social Security provides some pretty great benefits for your spouse and children if you die. Make sure to factor those in so you don’t over-insure.
The benefit is likely not as great as you think. IMO I think it’s better not consider the SSA benefit and provide other $$$$ for your spouse and children. The SSA benefits can just be a little extra spending money for them.
I agree! We don’t have kids, yet, and SS provides no benefit if there are no kids involved. However, if there are no kids and both spouses work, there is no need for any benefits. My husband and I got along just fine individually before we got married. We could certainly each get along just fine individually (financially) speaking if forced into that position again. Plus, the surviving spouse would end up with the other’s retirement savings, which means the surviving spouse could afford to save a little less for retirement.
And if kids do come along, SS benefits plus 1.5x the salary of the higher income spouse will make up the kid gap in our case. (That happens to be what we have; we did the math; and it really will work out quite well). As before, the surviving spouse will inherit the other’s retirement accounts and so won’t have to save as much for him/herself. That, plus SS spouse benefits, plus SS child benefits, plus lower tax rate, combine to completely replace the lower earner’s salary. The higher earner’s salary is not completely replaced by all those benefits, but 1.5x the deceased’s salary in an immediate cash payment cuts the mortgage to almost nothing.
We were surprised by these calculations–we were all set to buy life insurance for both of us once the first child arrives, and we were amazed that we really will be fine financially without it.
No prob! I would get some insurance to provide for income until your kids turn 22. Just looking at my chart below, ~$15/month for $250K 10-15 year term seems worth it.
A point about employer provided life insurance…
Take what’s included but don’t purchase additional life insurance from your employer.
Instead, get a term life policy as Sam suggested.
The reason: If you become ill and can no longer work, you might lose the life insurance from your employer. Then, getting insurance when you’re ill is usually much more expensive.
Most term life policies are “level premium” i.e. same premium each year. Some employer life insurance plans increase premiums as you get older.
Very excellent point!
I have a $50,000 life insurance policy through my employer and I pay nothing for it – in fact they pay me because it costs less than the amount they pay for life insurance for each employee. I don’t see a reason to have any more as the people who would inherit my estate (my parents and sibling(s)) don’t depend on my income. I don’t see a reason to be more tax efficient about my estate either as I have no plans to die and my $600k estate will be a nice windfall, especially for my sibling(s).
If I don’t get married by age 30 (three more years), I plan to rewrite my will so that each of the current beneficiaries will get at most $250,000 and the rest will be donated to charity, possibly starting a scholarship at my alma mater. My parents are far wealthier than I am and have no need of my money and I want my sibling(s) to work hard for their money like I did. $250,000 would be a nice down payment on a house where they live though.
Sounds like sound reasons, especially if you don’t have debt.
The positive psychological effect I received after getting insurance is something that nobody talks about. Getting insurance gave me a lift that my death would actually be good for something specific.
I voted that I have no life insurance, but the truth is that I have 2.5x my salary up to $250k. Nowadays my salary is high enough that it’s not really 2.5x, but close enough. Employer plans are definitely a good thing.
I don’t know if you’ve written about long-term disability plans, but I’d be interested to see that as well. I do pay into it at work, but I’m not really sure what it all means.
Here is my post on long-term care insurance.
Sam, I believe he was referring to “long term disability insurance,” which would cover a significant portion of your income if one were to become sick and/or disabled.
This is something I am interested in as well. Being a single-income household, this is a huge risk factor for us. I have done some cursory searches regarding the topic but balked at the rates I was seeing – $400-$500/mo for coverage.
Thanks S. I’m actually a “she” ;-)
I appreciate the initial response, Financial Samurai, but S got it right – I am interested in learning more about the disability insurance you can buy from an employer. In my case, they offer a basic policy for free. For about $150/yr you can get extended coverage. I do, but it’s not clear to me if this is enough, more than needed, or just right.
If you ever get the chance, I’d love an article on the topic.
Ah yes, misread it. I haven’t written a specific post about long term disability insurance, but I did get it at work as well. The principles are similar if you have debt/dependents.
LTD kicks in after Short Term Disability is exhausted… usually that is 3 months. Each plan must be a little different, but my LTD was 80% of my base salary for 12 months after. Work insurance is almost always subsidized, so the cost always seemed to make sense for me to get it, just in case.
Long time reader of your blog. I have a business, wife, and two children. Life Insurance is a must in my environment. I also went as far as getting Disability and Long Term Care. There are some Insurance Policies out there that also have early cash in in the event of a serious diagnosis with a doctors note with a year or less to live. This allows you to do some planning for your family in the event of a life changing event. That is an important dynamic as our dependents might not know how to manage significant money from an Insurance claim.
The bad part about having your life insurance through an employer plan is if you ever leave your job (or for some reason get let go), you’re life insurance is gone too. Imagine working for a company from age 40-50, then leaving, you’d have to get life insurance re issued at what your new rating would be based on your current health at age 50, assuming you were in fact insurable still at that point (didn’t contract any major illness from 40-50). I would definitely at least consider the upside and flexibility of having life insurance through a carrier outside of work.