How much life insurance a person should have is not the same for everyone. Some experts just throw out a figure, such as 8-12 times someone’s annual income, for the correct dollar amount to carry. The problem with this is every person’s situation, income, and age are not the same. The true way to think about how much life insurance you should have is to look at the answer from how much would your survivors need financially if something happened to you. This is the starting point of the conversation for how much life insurance is needed.
When I used to talk to clients about their life insurance needs almost always it was a surprise to them on the amount of coverage required to take care of loved ones should something happen to them. The alarming truth when it comes to life insurance is most people just do not know where to start when getting an adequate life insurance dollar amount.
Not everyone may need life insurance. However, most people do need to have at least some coverage for a number of reasons. Someone that is a business owner may require even more coverage compared to an individual that does not run their own company. For the purpose of this article, we are going to focus on the general needs of why people need life insurance and how much a policy should carry.
Why do you need life insurance?
First, I believe it is important to cover why most people need some type of life insurance. It is particularly significant to point this out because many people either believe they do not need life insurance or they just do not want to deal with the idea that something could happen to them. With life, insurance denial is not something we all should be in. It is just a fact of life that we all live life and will one day pass on. As people age their life insurance needs typically decrease. But in earlier years people with children and dependents need to pay special attention to their life insurance needs.
Life insurance is needed:
Final Expenses and Funeral costs
At the very least you need to have enough money set aside to cover funeral costs and final expenses. The costs for this can run easily between $10,000-$20,000. Without this minimum coverage loved ones are left with the cost or even worse with a debt to take care of everything.
Cover Income
For children that are still living at home and dependent on the income of one or both parents, covering the income for expenses each month is specifically important should something happen and no more money is coming in regularly. Using life insurance to cover a person’s income is even more important if one parent stays at home to care for the children.
If the income of one or both parents was no longer available, how would the mortgage be paid? How would medical costs or college for the children be covered in the future? If a married couple does not have children and one of them does not work full-time, how would they be affected if there was no longer any money coming in each week, month or year?
Debt
Life insurance can be used to cover debts. Student loans, car loans, and a mortgage could all be taken care of with adequate life insurance coverage. This could mean the difference of a survivor having to sell a home and move or being able to stay where they are.
What is the answer when trying to calculate the amount of life insurance you should have?
Taking into consideration on why you are buying life insurance should begin to give you some calculations on an amount that you may need. If for example, an income is going to be required for a survivor to replace the income you were earning, this would need to be taken into consideration. A person that earned say 50,000 dollars a year would need at least one million dollars of insurance coverage to provide this income yearly with investments that returned 5% per year.
Using the example above you can quickly see that it should come as no surprise that most people do not have adequate life insurance. If the person with a 50k income also had two children, the possible future cost of their college education added along with any debt, it is easy to see that most people will never have enough life insurance to cover everything.
The simple answer to how much life insurance you should have is really how much can you afford to get you as close to what you might need. Take all of the costs and situations into consideration when trying to figure an amount of coverage. Also, look at how many years you may need the insurance coverage. Most often situations will change through life that will require either more or less life insurance.
Do not rely on only employer-provided life insurance coverage.
According to a study by Limra, sixty percent of all people in the US were covered by some type of life insurance in 2018. Many people only carry life insurance provided as a benefit by their employer.
Most employers do offer some free life insurance as a benefit to their workers. The free portion can be an amount usually between $25,000 and $50,000. Often an employee can sign up for supplemental coverage in addition to the free portion paid for by the employer. Additional life insurance coverage can be added many times for an added cost paid for by the employee. The added insurance may be something like three to four times a person’s salary.
There is nothing wrong with purchasing supplemental life insurance through an employer. There are a number of benefits to doing this that can include lower costs and acceptance without a medical exam for a higher amount of insurance coverage.
The issue with only having life insurance through an employer is that it likely will not be enough coverage even with supplemental insurance added to a benefit already provided. In addition, when your employment ends your insurance coverage ends unless you are able to continue the same coverage once you have left. This may be possible, but the cost of insurance is typically higher once you leave a job for the same coverage. With today’s world keeping the same employer for a long period of time is not statistically on your side. Your employment will end at some point and it is usually sooner than later.
Separating from an employer also causes an issue with life insurance coverage if you develop any health conditions and do not have coverage outside of your workplace. Certain health problems can make it difficult to obtain life insurance in the future or make the cost much more expensive. If your employment ends, you should have a life insurance policy outside of work already established. Something like a 15- or 20-year level term life policy already setup cannot deny a benefit or raise its rates once the policy is in force if a health condition arises.
Final Word
There is no exact formula everyone can use to determine the amount of life insurance they should have. The answer to what amount of life insurance you should carry will most likely be different from someone else. Although many people will tell you it should be a certain amount times your annual income, this is not necessarily always the case.
Understanding the reasons you may need life insurance is the first step in determining an amount that might be close to what you need. This is in addition to your income, number of dependents you may have and your age. The truth is that most people will never truly have enough life insurance to cover the income and expenses should something happen to them. However, it is important to try and obtain as much insurance coverage as possible to make things easier on loved ones left behind.
Sufficient life insurance can be obtained by a combination of coverage through an employer and getting more from an independent source outside of work. However, do not completely rely on employer-provided life insurance only. Health situations can change and employers are statistically likely to change many times during life. Having only life insurance through your work will not provide the coverage needed. Life insurance as a benefit from an employer only can leave you with more expensive insurance or even the possibility of no longer being insurable when employment ends.
