Health Insurance

How do I know how much life insurance I need?

This can be a daunting question to answer, although most life insurance companies will help you assess your financial needs. Life insurance is intended to provide for your loved ones in case you pass away. To determine how much life insurance you should purchase, you need to determine how much financial support you expect to give your loved ones over the course of your life. Some common things to consider are:

  • Recurring Monthly Expenses
  • Medical insurance (if your family is on your work plan and they would need to find new medical insurance)
  • College tuition for your children
  • Support for your parents as they get older
  • Mortgage, car and other loans or debt
  • Funeral expenses for yourself

You’ll notice that many of the items on the list above occur at different points in your life. Since your financial condition changes over time, so will your need for life insurance. For example, if your children have already graduated from college and their loans are paid off, you no longer need to maintain life insurance to cover that cost so you can reduce the amount of life insurance that you currently have.

Calculating the amount of insurance you need for fixed, one-time amounts (mortgage, debts, funeral expenses, etc) is easy: you just add up all of those amounts, and make sure that your insurance covers those amounts.

However, calculating the amount of life insurance you need to cover any recurring expenses can be quite challenging. You need to evaluate factors such as the expected inflation rate, your survivor’s expected return on the life insurance benefit, and how long they will need financial support for (will social security be available, will your your survivors work, etc.)

A very general rule of thumb would be to obtain $150,000 of life insurance for every $1,000 of monthly expenses. Another rule of thumb that many experts use is that you should have 7x your annual income in life insurance. You should certainly meet with a financial advisor and/or use one of the financial calculators available on the web sites of most life insurance companies to examine your situation specifically.

What is the difference between Term and Whole Life Insurance?

By far, the two most common types of life insurance sold are Term and Whole life insurance. The primary difference is that a term life insurance policy covers you for a fixed period of time, usually 10 to 30 years. A whole life insurance policy covers you for your entire life, and is more expensive. There are other variants of life insurance available, and we touch on those briefly below.

Term Life Insurance

Term Life Insurance covers you for a particular period of time, usually 10 to 30 years. If you die after your policy has expired, you receive no benefit. Term life insurance is much less expensive than whole life insurance. The premium that you pay is determined largely by your age, the length of your policy and of course your health. The younger you are and the shorter the coverage you purchase, the lower you will pay for that insurance.

You will pay more if you purchase a longer policy, but you will also be locking in the monthly cost of that life insurance policy for the length of that term. So, if you purchase a 30 year policy, and in year 15 you have a heart attack, your premiums will not rise a cent for the remainder of the policy.

However, you are not locking yourself into the policy. With most policies you can cancel the policy at any time for any reason (for example you found a better rate at aonther life insurance company).

Whole Life (Permanent) Insurance

Whole life insurance is an insurance policy that covers you for your entire life. Since the life insurance company will have to pay the policy at some point, the premiums are much higher than term life insurance. However, the premiums you pay never increase for your entire life.

The other major difference between whole life and term life insurance policies is that whole life insurance policies develop a cash value as you contribute to the policy. You can take advantage of this cash value by taking low cost loans against the value, or by using that value to pay your premiums.

If you cancel your policy, you will receive some proportion of the cash value of that policy in return.

Other forms of life insurance:

  • Universal Life Insurance – A flexible form of whole life insurance that allows the premiums and death benefit to vary as you needs vary.
  • Annual Renewable Term Life Insurance – A type of term insurance offering basic temporary coverage at an economical price. The premium may increase annually as the insured person gets older
  • Variable Life Insurance – one of the riskiest forms of whole life insurance, but it can also give the best return for your money. Essentially, the life insurance company will invest your insurance premiums for you. If the investments do well, the death benefit and cash value of the policy go up. If they do poorly, they go down. It’s a little like putting your savings into the stock market.
  • Survivors Life Insurance – A type of whole life insurance that covers two people. Also known as “second-to-die” or “dual life” insurance, usually used as an estate planning tool that pays its death benefit upon the death of the second insured person. The death benefit is generally used to pay estate taxes or other large estate-related costs.