How Much Life Insurance Do I Need?
How much life insurance do I need?
Life insurance, everyone needs some right? Not necessarily. Imagine if you are debt free and have $500,000 in the bank. You do not really need life insurance. Most people are not in that position so let's look and see what they should do.
There are many names for life insurance but there are basically only two types. You have whole life which also goes by many other names including universal life. Then you have term insurance.
Whole life will cover you for your lifetime. There is usually a savings account built in to this policy. It sounds like a good deal until you stop and think about it. The savings account usually earns 2-3%. In some real good policies it may earn 6-7%. You are saving money, but what happens when you die? Your beneficiary only gets the face value of your policy. If you have a $100,000 policy and have $10,000 in savings, you are out the $10,000.
Term life insurance insures your for a specific term. Most policies are 15, 20 or 30 years. The premiums are cheaper than the whole life policies because there is not a "savings" account in the policy. If you have a $100,000 and you die, your beneficiary gets $100,000.
So which policy should you get? I recommend the term life insurance policy, however, it is VERY important that you get on a good financial plan when you take out this policy. The reason is that when your term is up, you want to be able to be self insured. That means you want to be debt free and have a significant amount in the bank.
Let's do a comparison. I went to http://www.lifeinsure.com/lifeinsurance/wholelifequotes.asp (unfortunately this link no longer works) and got a quote for a $100,000 preferred policy on a 40 year old male. The annual premium was $677.00.
I then went to the Zander Insurance website and got a free online quote for a $100,000 20 year term preferred policy on the same 40 year old male. The annual premium was $157.00. I decided to check on a $400,000 policy and the premium was $368.00. You can get 4 times the policy for nearly half the price when you get a term life insurance policy!
If you then take the $300 per year that you are saving and invest that in a mutual fund that earns 10%, you will have an extra $14,215. So by using term life insurance, you have had $400,000 coverage for 20 years and have gained $14,000 instead of simply having $100,000. Now is where the planning kicks in. If you are debt free and continue to invest that $300 a year into your mutual fund for 20 more years, you will have $94,892. You will also have freed up $368 per year when you dropped your term insurance after 20 years.
Some people may think that you can not become debt free in 20 years, but if you think about it, it is quite possible. For starters, when you buy a house get a 15 year fixed rate. You are then guaranteed to have that house paid off in 15 years or less. If you want more information about how to be debt free, I encourage you to check out daveramsey.com. It can be done!
So we are back to the title of this article. How much life insurance do I need? Ideally you should have 10 times your annual salary. If you can not afford that, the next best amount is to have enough for your funeral and pay off all of your debts, including your house. If you owe $100,000 on your house and have $50,000 in credit card, student loan and car debt then you should be looking at around a $175,000 policy. For any stay at home moms or dads you should at least have enough to pay off all of your debts and pay for the funeral. If you can afford to carry more insurance than that, I would recommend it. Somewhere in the $400,000 would be a good figure in my humble opinion.