According to Statista, 54% of Americans have a life insurance policy. More data from Policygenius shows that 40% of those insured wish they had purchased their policies at a younger age and 29% of American adults intend to buy their life insurance online.
But how much life insurance do you really need? In this article, we’ll discuss what life insurance is, what types there are, who might need it, and how much you really need.
What is Life Insurance?
Life insurance is a type of insurance where benefits are paid (as cash) to those you designate in the event you die. This is assuming your premiums are paid current. Most people are given access to life insurance through their employer, but often that’s not enough to cover dependents (think spouse and children) with a complete loss of your income if you pass away unexpectedly.
Who Needs Life Insurance?
Believe it or not, not everyone needs life insurance. Those who are single, have no dependents or nobody to care for financially probably won’t get a lot of value out of life insurance. After all, if something happens, who would receive the cash payouts?
That said, anybody who has a family to take care of, is the primary source of income, or is soon expecting children, will absolutely benefit from having life insurance. In fact, for those groups, we think it’s essential.
For example, if you’re married with two children, passing away unexpectedly will not only be a huge emotional loss for the family but a huge financial loss - being that you aren’t there to provide anymore. This sounds a bit morbid, but it’s something you need to think about and have a backup plan for - hence the reason it’s such a necessary type of insurance.
The Types of Life Insurance to Know About
There are two main types of life insurance you need to be aware of before you buy a policy - whole life insurance and term life insurance.
Whole Life Insurance
Whole life insurance can be incredibly complex, but it offers you life insurance forever, as long as you’re paying the monthly premiums. The other benefit to whole life insurance is that it has a cash value - which is determined by the insurance provider.
This “cash value” is a portion of the premium you pay that gets invested into different types of equities and you are able to leverage the cash value in the future - such as pay your premium with it, take a loan from it, or use it for retirement income. Whole life insurance is typically a lot more expensive than term life insurance.
Term Life Insurance
Term life insurance gives you life insurance benefits for a specified term - such as 10 years. As long as you’re paying your monthly premium on time and the policy is active, your dependents will receive the death benefit (a cash payout) if and when you die.
Term life insurance is beneficial if you’re younger, healthy, and are still accumulating wealth. It’ll protect your family and provide a financial safety net as you work on growing your nest egg and income. In fact, it’s the only type of policy one of our providers - Bestow - offers.
Once the term ends, though, you’ll need to either get a new policy or not have life insurance. This can be good or bad, based on your situation. If your policy ends when you’re 70 years old, it might cost a lot more money to get re-insured for a term life insurance plan since you’re older.
On the flip side, however, if you’ve spent the previous term building wealth and you no longer need life insurance to fall back on if you die, you may not have to buy a policy at all.
So it really depends on your age, health, and financial situation. In most cases, though, we recommend term life since it’s cheaper and provides coverage for a term that works for you.
Top Life Insurance Providers
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Bestow brings the process of buying term life insurance entirely online. With this company, you don’t have to go through an agent to buy life insurance or submit to a medical exam. Answer some questions and Bestow will offer you instant quotes for policy options with up to $1 million in coverage. There are some limitations, though. Bestow only issues policies to people under 55 and terms are limited to 10 and 20 years. Read the full review.
Ladder offers term life insurance online issued by Fidelity Security Life Insurance Company. U.S. residents aged 20 to 60 can apply for coverage online and get an instant decision. As its name suggests, Ladder’s policies are designed to allow users to move their coverage amount up and down by applying online for more coverage or decreasing coverage with a few clicks as their needs change. Read the full review.
Haven offers a quick and painless way to apply for term life insurance, and has become a popular choice since it was founded in 2015. While it only offers term life insurance, this focus means that it is able to focus on delivering a quality service with competitive terms and rates. Read the full review.
How Much Life Insurance Do You Actually Need?
How much life insurance you need really depends on your personal situation, which includes your health, age, finances, and other factors. That said, there are two “rules of thumb” that you can use as a starting point to decide how much you actually need.
10 Times Your Income
The most common advice given is to buy a life insurance policy that covers 10 times your annual income. So for instance, if you’re using Policygenius and you make $90,000 per year, you’d buy a policy with a $900,000 limit. Fees and fine print aside, your dependents would then get $900,000 if you died.
A variation of this is to add an additional $100,000 for every child you have. So in that same situation, if you also had three children, you’d add another $300,000 in coverage - making your total policy have a $1.2 million limit.
There are limits to this thinking, however. If you have significant savings or live well below your means, for instance, you may not need as much. Your employer may also give you a portion of this at a low cost.
This strategy looks at your DIME (debt, income, mortgage, and education) to help come up with a figure that’ll cover your family completely with life insurance if you die. Basically, you add all of these things up to get a rough estimate.
Debt is your total debt minus any mortgage balance. Income is your annual income, multiplied by the number of years your family would need to be covered (which varies greatly). Mortgage is the balance to pay off your mortgage in full. Education is the cost of paying for higher education for your kids (i.e., college).
So for example, if you have $20,000 in debt, you make $90,000 a year and your family will need that for 10 years, you owe $250,000 on your mortgage, and you estimate needing $100,00 to send your kids to college, your DIME number would be:
20,000 + (90,000 x 10) + 250,000 + 100,000 = $1,270,000
Using this formula, you’d need just under $1.3 million in life insurance coverage. It sounds like a lot, but providers such as Sproutt actually give coverage up to $1.5 million. For a more detailed analysis of this, you can use a form like the one Securian Financial put together to get a more accurate figure.
This is just scratching the surface of how much life insurance you need. Everyone’s number will be different, but this should give you a ballpark figure of where to start. As a next step, we recommend checking out our best life insurance company reviews to determine which insurer, type of policy, and how much coverage is right for you.