How Much Life Insurance Do You Need?

Why you need life insurance

The 2019 Insurance Barometer Study found that 40% of households that lacked life insurance would have immediate trouble paying their bills if their primary wage earner died.

If you have someone (a spouse, children, a partner, or an aging parent) who is dependent on your financial or physical assistance, it's important to have life insurance so they are able to survive financially in the event the unthinkable happens. If you're single with no one depending on you, you may want to carry life insurance if you have outstanding debt that has a co-signer.4

Getting life insurance is easier than you think

If you or someone you know has tried to get life insurance in the past, you're probably familiar with a process that's slow and time-consuming (it requires a lot of paperwork, a medical exam, and a blood draw).

But the life insurance market has been changing over the past few years, thanks to a product that's been around for awhile but is now seeing its day in the sun: simplified issue life insurance. With simplified-issue life insurance, you can often get insured in a matter of days, without needing a physical exam or blood test. As for paperwork, you simply answer a handful of questions. The policy issuer then verifies those answers through a variety of databases.

If you're looking to get a life insurance in place quickly and without much effort, a simplified-issue policy may be the way to go. Just be aware that some policies have what's known as a graded benefit, which means you need to hold it for a certain length of time (often two years) before the death benefit kicks in. If you want benefits to kick-in upon purchase, ask your agent how the policy works and read the fine print carefully.

Employer-based life insurance

Employees are sometimes surprised to learn that they can buy life insurance through their employer. The types of life insurance policies offered may vary, and you may have to wait until your employer's life insurance open-enrollment period to qualify. If you have a job, it's worth asking your HR department what sort of life insurance policies (if any) your employer offers.

Because your employer will typically qualify for a group rate and pay a portion of the policy's cost, employer-based life insurance may cost less than what you'd find on the open market. However, you may find that the maximum death benefit of your employer's life insurance policies do not provide as much coverage as you need.

Not sure what to do? It's worthwhile to run the numbers of see how much you'd pay buying what you need on the open market versus what you'd pay if you got an employer-based plan and supplemented it with a smaller open-market plan.

How much life insurance do you need?

There's no simple answer to how much life insurance you need. It really depends on your life situation. If you're single and have no children, you may just want a policy that would cover your funeral and burial expenses. That way your loved ones won't have the added burden of those costs after you pass on.

For people with spouses and dependents, however, the situation is more complicated. The classic rule of thumb was that you should have 10 times your annual income, while variations of this rule suggested that five to seven times your income was sufficient.

However, the general principle remains the same: You want to make sure you purchase enough to cover your outstanding debts and take care of your dependents when you're gone. Important variables to consider are your income, your current and future expenses (like college education for your children), and how long your dependents will need money from your policy to help cover their daily living costs.

Permanent (Whole) vs. Term Life Insurance

When it comes to choosing the right type of insurance, you have two main options: permanent and term.

• Permanent life insurance, also called whole life insurance, is designed to cover you for your entire life. There can also be an investment component or cash value to help you grow money tax-deferred. Modern policies also allow you to bundle your insurances. The death benefit can serve two purposes; protect your loved ones when you die or protect you if you need long-term care. Some policies allow you to access the death benefit while living to help pay for LTC expenses.
• Term life insurance, on the other hand, covers you for a set period of time (such as 20 or 30 years). Essentially, it's meant to protect your dependents in case you die early, with no other value other than the death benefit. It's the more simple form of life insurance, and it usually costs less.