How Much Life Insurance Do I Need? (And Do I Need It At All?): A Patch Advisor Report

40 percent of Americans have no life insurance at all, according to Limra’s 2015 Life Insurance Barometer Study.

And yet, life insurance remains an effective way of protecting family and loved ones in the event of one’s death, one that covers everything from basic funeral expenses to survivors’ total cost of living for years.

Still: 30 percent of Americans say they need more life insurance, and 25 percent say they wish their spouse or partner would buy life insurance or add to the amount of coverage. All of which raises the big question: How much life insurance do I need?

Many insurance companies like Protective Life offer life insurance needs calculators to help you figure out specific coverage amounts, as do independent personal finance organizations like the American Institute of CPAs. And there are various (and very unscientific) rules of thumb that suggest you should carry four to seven times one’s annual salary in coverage.

Whatever method one employs to arrive at a hard number, the fact is that many types of life insurance are less expensive than many people believe. But before diving into the question of how much life insurance you need, let’s examine the basic types of life insurance.

Term life insurance vs. Permanent Life Insurance?

There are two basic types: term life and permanent life.

Term life insurance is essentially temporary coverage. So if you buy, say, 20 years of term life, your family gets coverage for 20 years from the start of the policy.

It does expire at the end of the term, but it is usually much cheaper.

For example, a 30-year old male could get $100,000 of life insurance coverage for 10 years for as little as $7.32 a month.

What is permanent life insurance?

Permanent life policies are, well, permanent. They last as long as you are making payments, and some permanent life insurance policies have flexible options that can lessen the burden of monthly payments as the policies age and acquire cash value.

There are 3 basic types of permanent insurance:

• Whole life: In which the policy-holder pays a fixed amount each month for the duration of the policy.
• Universal life: Which have more flexible premiums and which may fluctuate in value over time depending on the specific terms of the policy.
• Variable life: Which allows the holder to invest a portion of their premium each month in investment vehicles similar to mutual funds, and which may gain or lose value depending on the performance of those investments.

These policies are typically more expensive but offer features like cash value, where you can withdraw from and borrow against the money you’ve paid (at the expense of your death benefit).

Some permanent life policies even allow you to adjust your monthly payment or put part of your payment into an investment.

So: How much life insurance do I need?

The basic idea is to be able to provide for people who are dependent on you for your income and to make sure that they are taken care of until they can get on their feet.

This means you’ll need to consider a number of factors like your income, debt, savings, age of children, college, etc... (All the things that keep you up at night.)

A few basic factors to consider:

• How long will your children depend on your support, should you die? If you have very young children, for example, you might need more insurance than if you have teenagers.
• How much money does your spouse make in his or her career? If you’re the primary breadwinner, you should consider more coverage, not less.
• How much debt do you have? Those with a lot of debt could leave their families in precarious financial condition with too little coverage.
• How much savings do you have? If you have healthy savings and retirement funds that your spouse can access, you might need less insurance.

A personal financial advisor would be able to go into much more detail on it, but you can run a quick, back-of-the-napkin insurance calculation here.

So, how do you buy life insurance?

You can get quotes on any major life insurance provider’s website.

A life insurance advisor can also sit down and meet with you, review your finances and come up with a policy that fits your needs.

From there, you’ll likely have to get a basic medical test done to determine your health. Beware: many insurers won’t issue policies to people in poor health.

And while the check-ups can be a minor inconvenience to schedule, the good news is once that single check up is out of the way and your policy purchased, you’ll have the peace of mind of having protected your family.