Insurance Insurance

How Much Life Insurance Do I Need?

Many people wonder just how much life insurance they really need.
There can be some difficulty figuring this out for two reasons.
One, most people who are not financial professionals don't understand life insurance.
Two, there are often conflicts of interest where insurance agents working on commission want to sell people either too much or inappropriate types of life insurance, and consequently their legitimate efforts to educate prospects are in vain as the prospects suspect they are being sold on something they don't need.
So, what's the reality? Question one is, do you need it at all? The answer is: it depends.
If you're single, and especially if you're young and single, the answer is no.
Note: that doesn't mean you still can't make excellent use of it, though.
Some young people who definitely plan to get married some day decide to buy life insurance now while their premiums are the lowest they'll ever be.
If you take this strategy, make sure you buy a permanent policy, and make that policy a type of Universal Life policy.
This will keep your premiums super-low, especially if you are perfectly healthy and don't use tobacco products, while building you a substantial investment all tax sheltered within the policy.
There is another time you don't need it at all: when you have become "self-insured".
Now, this is the most prominent time when life insurance agents find they have a conflict of interest with you.
Life insurance was never meant to be permanent; it was never meant to be for your "whole life".
Universal Life policies can be used as nearly miraculous investment vehicles, but outside of them you should be planning your finances in such a way that within a certain period - say 20 to 30 years - you can drop all of your life insurance (although, you can still make very strategically sound use of it for estate planning purposes, but again that's a different story).
So, let's say you were 30 years old and had a good career going and bought a 20-year level term insurance policy.
You also found yourself a good financial planner and you have been investing money in stocks wisely and regularly since that time, and now you're 50 years old and have a relatively high net worth that is easily more than your final expenses would cost and would continue to take very good care of your family should you die tomorrow.
Your agent wants to set up an appointment with you to see about selling you a new policy.
Hang up the phone on him.
Let your term policy expire and be done with it.
You don't need it.
So, let's go back to being 25 or 30 and you're married.
You definitely plan to have or already have children.
You have a mortgage.
You definitely need insurance.
You probably need substantially more than you think you do.
In fact, you should plan on buying anywhere from 10 to 20 times your present annual income.
Yes, you read that right.
This means, therefore, that if you are earning $60,000 a year, you roughly want $600,000 to $1.
2 million worth of death benefit.
And, you want to base this amount not on your take-home pay, but on your pre-tax amount of salary or compensation.
Your surviving family will need to actually replace your income should you die young.
If you take $100,000 in coverage, which sounds like a lot because it's more than you earn in a year, that money will be gone in less than two years (and it might be gone in two months)! You also need to consider that inflation eats away at the value of the dollar - agents and financial pros refer to this as the "time value of money".
Your family will need to offset inflation by investing most of the money you leave them as death benefit.
Good agents can and will help them with this, by the way.
When figuring out your "income" to replace, add up: your pre-tax, pre-deductions regular pay; anything your employer pays into your company retirement plan; and any bonuses you can earn at your company.
This is the figure you use to come up with your needed life insurance amount.
Also: the industry standard is to assume an annual rate of inflation of 4% and an investment return rate of 6%.

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