Buying Life Insurance


How Much Life Insurance Is Enough?


A question we often hear at Life Insurance Think Tank is “What is the best age to buy life insurance?”  No matter what the client’s situation, the answer is always, “NOW”.  For people wondering whether or not you should buy life insurance you should ask yourself this one simple question: “If I die tomorrow, will it affect anyone financially?” If you answered “yes”, it is time to start doing some serious research for life insurance. Whether you are 25 and newly married to the 40 year old with a spouse and three children, all the way to 70 year old that wants to protect his or her estate and legacy, Life insurance can offer the ultimate protection and peace of mind.  Life insurance can ensure that both your debts and loved ones will be taken care of in the event of your death. But before you buy it, you need to educate yourself on the ideal insurance to meet your specific situation along with finding out “How much insurance is enough”?

Although it is always the right time to buy life insurance, there is no one size fits all answer to how much life insurance is enough for each individual.  There used to be a standard formula that many insurance agents used that said you should buy coverage that is equal to eight to ten times your annual income.  So if you made $100,000 per year, you should have a minimum of $800,000 to $1,000,000 of life insurance in place.  However, this “rule of thumb” seldom is spot on and your situation could require much more or much less life coverage.  For instance, a 65 year old couple that still makes $300,000 a year, are empty nesters, and on the verge of retirement, might not need $3,000,000 in life coverage.  But on the other hand, they might have a huge taxable estate that calls for even more than $3 million in coverage.  So you can see how this decision completely changes per individual household.  Make sure to check out our Life Insurance Calculators to determine the correct direction for your life insurance purchase.

Who Needs Life Insurance?

Although every case is unique, the rule of thumb is that once you become a parent, any and all adults in your house earning income should have life-insurance coverage that will last until your youngest child completes college.  Other factors, such as high credit card debt, your student loans, mortgage, and other financial obligations could further necessitate the need for higher life coverage.  In those cases, you could use life insurance to ensure that these debts are covered if the unforeseeable happens. Because life-insurance death benefits are tax free benefits, many financial planners often use clients’ life-insurance benefits to help pay for the estate taxes generated upon the death of a loved one.

Qualifying for life insurance will be determined by your medical exam.  These days, most insurance carriers will have a certified nurse or examiner come to your home, office, etc to ease the process of qualifying for life insurance.  To determine if you qualify, most life insurance policies will require you to undergo a medical exam that will primarily check for high cholesterol and blood-sugar levels. Furthermore, prior to issuing the policy the insurance company will also check things such as your medical history, hobbies, credit rating, alcohol-related issues and driving record, just to name a few. If you are a smoker, heavy drinker, have been in numerous accidents, or have a family history of cancer, you can expect to pay more premiums that the average person.

Another big question besides “how much insurance” that usually arises is “what kind of insurance do I need?”  As you do research, you will find a myriad of different theories on this.  Many advisors and insurance specialists will tell you that if you can afford it, the universal life is the only way to go.  Conversely, you will find articles by Dave Ramsey and Clark Howard that say term insurance is the way to go.  The answer is that both theories are correct.  Just as no one car or home could be a perfect fit for every family, life insurance is in the same category.  Regardless of which angle you take in regards to type of insurance, the most important piece of the puzzle is making sure you have enough coverage.

The two primary methods used to determine the amount of insurance an individual requires are the ‘human-life approach’ and the ‘needs approach’. The human-life approach projects an individual’s income through his or her remaining working life expectancy, and then the present value of the life is determined by means of a discount rate.  With the needs approach, all reoccurring and unusual expenditures are examined to determine the amount of life insurance needed.  And although both approaches have their pros and cons, at the end of the day, it comes down to a personal decision.  Always ask yourself, if you pass away tomorrow unexpectedly, how much will your loved ones need to live comfortably now and into the future.  Finally, make sure to check out our life insurance calculators to begin the process of finding your ideal coverage.