How much life insurance do you need?
Ian Berry/CNN

How much life insurance do you need?

The pandemic has made it very clear to everyone that life doesn’t go as planned.

It’s also been a bracing reminder that we could die way sooner than expected. And that means you could inadvertently leave people you love in the lurch.

Which brings us to one of the least popular yet relevant topics: life insurance. Who needs it? When do you need it? How much should you get? What will it cost? And where should you get it?

Who needs life insurance and when?

Not everyone needs life insurance, but many people would benefit from having it at certain points in their lives.

“Who needs it? Anyone who has somebody they love or care about who is depending on them,” said Megan Kopka, a certified financial planner in Wilmington, North Carolina, who was herself widowed at age 38 with two children when her husband died from amyotrophic lateral sclerosis, more commonly known as ALS or Lou Gehrig’s disease.

Think of it this way: “Who would have a financial loss at your death?,” said Mark Maurer, president and CEO of LLIS, a Tampa, Florida-based insurance agency that works exclusively with fee-only financial advisers.

Obviously, your young children may suffer financially without you, especially if you’re a single parent.

If you’re married, even if you don’t have kids, “you may still want income replacement for your spouse,” said Colton Etherton, a certified financial planner based in Beaverton, Oregon, who works primarily with Millennial clients. This is especially the case if your spouse earns considerably less than you.

And regardless of marital status, don’t forget about aging parents or an ailing family member if you’ve been helping them or have promised to.

Lastly, consider who might be held liable for any debts or other big expenses you leave behind, such as a parent who co-signed a loan or a spouse with whom you share financial accounts or who co-owns a business with you.

However, you probably don’t need life insurance if:

  • You’re single, divorced or retired and you don’t have dependents or a partner who relies on you financially.
  • You have sufficient assets to provide your survivors with funds for all of life’s major expenses for years to come (including mortgage, education, healthcare, retirement income, etc.).
  • You’re married to someone who is wealthy enough to support themselves and your kids in the style to which you’ve both become accustomed.

How long should your life insurance policy last?

Several forms of life insurance are “permanent,” meaning they cover you for your entire life. They can be a useful estate planning tool for those with means, Kopka said. But many policies also come with complicated investment and savings components, plus expensive premiums.

“[Permanent insurance] is not recommended unless you are hitting all other financial targets, [such as having sufficient] insurance coverage on all things including personal liability, [you’re] maximizing retirement savings, etc.,” she said.

For most people, however, the most affordable and straightforward type of life insurance is term life, which will cover you for a set number of years — e.g., 10, 20 or 30 years.

Kopka, knowing the financial stresses of premature widowhood when you have kids, recommends every young parent with a newborn get a 30-year term life policy.

But at a bare minimum, Maurer said, consider having a 10-year policy. “Once you have kids you need at least 10 times your earnings.”

If your children are young, you might want to get a policy that lasts at least long enough to cover their expenses until they’re 18 — or 22, if you want to help pay for their college education.

How much do you need?

How much life insurance you buy — that is, how much money it would pay out if you die — depends on a ton of variables: how much you earn, how old you are, how healthy you are, how many kids you have and their ages, what big expenses you anticipate over the next few decades, etc.

Many people have some life insurance coverage that their employer provides. Such policies promise to pay your beneficiaries either a flat amount (e.g., $50,000) or a multiple of your salary (e.g., 1 x annual salary) upon your death.

But that free coverage, while useful to have, is usually insufficient to cover your survivors’ needs, especially when you have young kids. That’s because you’ll need that money to cover expenses each year until your dependents don’t need support anymore.

Remember, too, about new expenses your survivors may have to incur in your absence. “If my wife were to pass, I’d have to find someone to help [with our kids] so I can keep working,” Etherton said.

So how can you put a number on all that? Once you’ve determined the yearly income your family will need in your absence, figure out a sum that can generate that much or something close to it. (Calculators like this one can help you get a ballpark idea.)

While a $1 million policy sounds like a lot, Kopka said, consider how much that amount might throw off every year if your beneficiary invests it conservatively — perhaps 3% to 5%, or $30,000 to $50,000. So if your current income is higher than that now, you may need to insure your family for more if you want that money to support them for a few decades should you die young. But if you expect they won’t need it for more than 10 years, $1 million might suffice.

How much will life insurance cost and where should you get it?

The younger and healthier you are when you buy a term life policy, the more affordable it will be.

Maurer ran some numbers, pricing out a $1 million term life policy for a male, non-smoker with a locked-in guaranteed premium for the duration of the policy.

If he bought a 20-year term policy at age 25, he’d pay $477 in annual premiums (or about $40 a month). If he waited until he’s 35, he’d pay $533 a year (nearly $45 a month). And if he bought the same policy at age 45, he’d pay $1,223 a year (roughly $102 a month).

If you do get life insurance through your employer and you want to increase your coverage, you likely will get a better deal shopping for a new policy on your own if you’re young and healthy.

“The employer-sponsored coverage generally has one rate class — so that covers those in all types of health and they all pay the same rate,” Maurer said.

And your premiums for the supplemental coverage you buy through your employer will likely increase every five years once you turn 30, he added, whereas you can lock in the premium cost for the duration of any policy you buy on your own.

But if you’re not in great health, Maurer said, you likely will be better off just paying for increased coverage within your company plan, because outside insurers will charge you more based on your health condition.

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