How Much Life Insurance Do I Need?

Recently two friends of mine from high school passed away in their early 30s, which drove me to ask the question; How much life insurance do I need? Back in 2008 right before my son was born I took out a 20 year $500,000 policy for $21 per month. Since 2008 my income has doubled and we now have 2 more children that we are taking care of (due to my sister in law passing away), and the youngest is 5 years younger than our son. What I like about life insurance is that you can “set it and forget it”, the problem with this is that over time your life changes and life insurance needs to be revisited.

How Much Life Insurance Do I Need?

Typically financial advisers recommend having 10 to 15 times your annual income in term life insurance.  With my annual income being around $60,000 this means I should now have total life insurance coverage of around $600,000 to $900,000.  My current amount of $500,000 falls short of that. The price difference between adding $250,000 and $500,000 was around $5 per month, which is a great price break for the extra quarter million.  Since I was already going through the process I decided to go to the higher side of the equation. In most situations life insurance is not taxable, so the face value of the policy is the total amount your beneficiaries will get.

Stay at home parents also need to evaluate how much life insurance they need.  This is often overlooked by consumers because the focus is so much on income replacement.  It costs a LOT of money to even begin to replace what a stay at home parent does.  At a minimum I would recommend getting a $250,000 policy for stay at home parents.

I looked through my legacy drawer and found the instructions I had for my wife in the event that I passed away. These instructions are very specific and somewhat complicated.  I started thinking more in depth about this and I absolutely don’t want her to have to worry about money at all if I were to die.  With $500,000 her immediate needs would be taken care of, but there is still room for error with retirement savings and launching our kids into adulthood.  If it costs another $20 a month to have an extra $500,000 in coverage, that’s a pretty good deal.

In fact, I think term life insurance is probably the best deal I can think of.  For $240 per year the insurance company will take on the risk of me dying and will pay $500,000 if I die.  That’s a 2,083 to 1 payout, and they are willing to make that deal for 20 years in a row.

How Long Do I Need Benefits For?

I initially thought about getting another 20 year term, however I paused and decided to go with a 15 year term, here’s why:

  1. 15 years from today our kids will be 20, 22, 25, and 30. All will be grown and 3 of them should be finished with post high school education, with one halfway through. The primary reason for life insurance is to finance the children reaching adulthood.  If the youngest is 20 I have achieved that mission.
  2. 15 years from now we will most likely be self insured and have a net worth of over $1 million.
  3. If I want to get more life insurance down the road a shorter term may be cheaper.  I’m 10 years older than I was when I got my first policy and a policy covering me for the next 15 years is only $15 per month as opposed to the $21 per month I’m paying for my current policy (which was a 20 year policy). Perhaps 10 years from now at 41 I could get a 10 year policy without paying much more per month, which would extend me another 5 years.

Setting Beneficiary Designations:

Some people make their children direct beneficiaries of policies, and you can split the benefit up between multiple people if desired.  Making minors beneficiaries can create legal complications.  Currently Mrs. C. is the primary beneficiary and her sister is my secondary beneficiary.  It is important to reevaluate beneficiaries over time.  Most likely once our oldest child is 18 I will change a portion of the policy to go directly to him.

Getting Life Insurance:

Getting life insurance is much easier now than it was 10 years ago.  When I applied for life insurance back in 2008 it seemed like I had to answer a much longer questionnaire about my health and my family history.  I had to talk to someone on the phone for at least 2 phone calls, and I had to schedule a representative to come to my home to do my medical evaluation.

When I went to get life insurance this time around I went through Haven Life, which is fully owned by Mass Mutual.  Their website was easy to navigate and I could see how much my insurance would cost if I changed the length of the term or the amount of coverage, which made it a transparent and expedient process.  I answered a few health questions and was pre-approved for coverage in less than 5 minutes without having to talk to anyone on the phone.

I then was able to schedule my health exam through their website which allowed me to choose to have someone come to my house or to get my exam done at a local exam center.  I went to the exam center the next day and the exam took roughly 15 minutes; height, weight, blood pressure, blood sample, urine sample, done!

All in between signing up online and taking my health exam I had less than an hour of time wrapped up in getting insurance coverage.  I added a 15 year $500,000 policy that will be able to provide for my family in the unlikely event that I pass away in the next 15 years.

Know Your Social Security Benefits:

In addition to getting your life insurance needs squared away it is important to know your Social Security survivor benefits.  These benefits are based on your age, your earnings record, and your number of minor children. If I died today, Mrs. C. would receive $3,656 per month until my stepson is 18 (or 19 and still in high school), and then $3,104 per month until our son is 18.  No benefits would be paid off of my work record for our nephews.   For our nephews we currently receive around $800 per month for the two of them, which is based on their mother’s work record and age.

Social Security benefits should not be your only source of income to pass on to beneficiaries, but it is important to include it for planning reasons.  It’s also a good idea to take a look at the formulas and set up an account at SSA.gov to see what your projected benefits are.

 

How much life insurance do you think you need?  Do you have enough?

 

John C. started Action Economics in 2013 as a way to gain more knowledge on personal financial planning and to share that knowledge with others. Action Economics focuses on paying off the house, reducing taxes, and building wealth. John uses the free tool Personal Capital to track his net worth and posts quarterly updates on his finances. Check out the Action Economics archives section for all past posts.

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