One of the greatest gifts you can give your family is adequate life insurance.
Your life insurance coverage is designed, of course, to provide your loved ones with a means of support should something happen to you.
A good life insurance policy can provide you with peace of mind now and take care of your family later.
But how much life insurance do you need?
Do You Need Life Insurance? (Seriously)
Life insurance has only one purpose: to complete your financial responsibilities if you die.
If you have no dependents or anyone else that relies on your income, you don’t currently need life insurance. Don’t fall for a common trap: life insurance is not an investment.
If you do have dependents, you should buy term rather than whole life, in almost every case. I’m going to assume you are familiar with the differences between term and whole life insurance already. It is a good idea to familiarize yourself with your options if you’re not.
Why Do YOU Need Coverage?
Before you figure out how much life insurance you need, stop, and think about the reason you are getting life insurance. This can help remove the sting of paying the premiums.
The point of life insurance isn’t to provide you with money for retirement or any other purpose (although some cash value policies offer those promises). It’s supposed to be a way for you to help your family.
When Do You Need Life Insurance?
Life insurance is there to replace your income if you die, so if you have anyone relying on your income, then you need life insurance. If any of the following situations apply to you, then you probably need life insurance:
- You have dependents (children, spouse, partner, parents living with you, etc.)
- Someone relies upon your income or the value you provide
- You have a mortgage or other large debts
- You have a large or complicated estate
- You own a business or have a partner in a business
Life insurance can be used as a tool for estate planning and can be useful for avoiding probate or taxes in certain situations. If you have a large or complicated estate, then you should meet with a lawyer or estate planner to help you determine the best course of action.
When You May NOT Need Life Insurance
You may not need life insurance if:
- You have no financial dependents and probably will not in the foreseeable future
- You are retired and living off investments or other income sources, and your spouse or other dependents will have enough income from those sources if you pass before him/her
- Children rarely need life insurance. The only time it makes sense to get life insurance on a child is if they are earning income and that income needs to be replaced if they die.
Note about children’s life insurance: Some life insurance companies will offer a rider on an adult’s policy that gives your child a few thousand dollars coverage, and depending on the company, may guarantee the child coverage after they turn age 18, regardless of their health.
The life insurance company I use offered $20,000 coverage for my daughter for an additional $2 per month on my life insurance policy, and the guarantee she would be eligible for coverage after age 18, regardless of health. Use your judgment on this type of plan.
How Much Life Insurance Should You Buy?
Remember, life insurance is meant to make up for your lost income. We need to figure out how long your dependents will depend on your income, or in the case of a stay-at-home spouse, the value you provide in taking care of children or running the household.
Another option to think about is mortgage life insurance if you feel it would be beneficial to your family, though term life these days may be a better value.
So, what’s a realistic amount to get?
One rule of thumb is to multiply your income by 17 and buy that amount of insurance. If you bring home $48,000 a year you need $816,000 in term insurance. This is a rough estimate but let’s see if the rule of thumb works.
Without getting bogged down in lots of detail, let’s make some assumptions:
- You and your spouse are 45 years old.
- You each bring home $4000 a month for a total of $8000.
- You have one child, age 7.
- You will retire in 20 years.
- The $8000 in monthly income allows you to save for your child’s education and your retirement.
- If one of you dies, your expenses will increase by $1000 monthly to pay for extra childcare for five years.
- Inflation will be 3% over the next 20 years.
- Investment return will be 5% over the next 20 years.
- You already have $150,000 in savings.
In this example, you need to replace $5000 in monthly income for the next five years and then $4000 for the next 15 years.
Tell you what, we’re just going to replace $5000 for the next 20 years and give the surviving spouse a little bonus for putting up with you as long as they did.
Of course, you should consider the needs specific to your situation.
For example, do you have a family member with special health care needs? Are you a military retiree with a pension and Tricare for the rest of your life?
If you opted for the survivor benefits plan, then you may be able to decrease your life insurance policy if your spouse will have your pension.
Do You Have a Lot of Savings and Investments?
Some people have enough money saved to provide for their families, even if they are no longer able to contribute to the family. Consider the possibilities and increase or decrease your insurance policy accordingly.
Special Life Insurance Options for Military Members and Veterans
Military members and veterans have special options, including the government-sponsored SGLI plan, available to current military members, and the Veterans Group Life Insurance plan, available to veterans.
These low-cost plans may be a good idea since many civilian plans don’t cover deaths caused by acts of war. You can also convert your SGLI to VGLI when you leave the service.
There are also some life insurance plans offered by civilian companies that are great options for military members and veterans. One good example is life insurance from USAA.
USAA offers insurance, banking, and investment products. They limit membership to military members, their families, and children of USAA members, so they know what it means to serve.
You can check your USAA eligibility here and learn more about their financial products.
Where Military Members Should Buy Life Insurance
For most military members, the Servicemembers’ Group Life Insurance (SGLI) program is the best option because it is available to everyone and will pay out even when the policyholder dies from an act of war or similar event. (Many private insurance policies have a rider that excludes death from an act of war.)
The SGLI policy also includes a long-term disability rider called the Traumatic Injury Protection coverage (TSGLI).
SGLI offers great military life insurance rates. The government-supported company, the Service Member’s Group Life Insurance program offers troops insurance coverage of $400,000 for only $27 per month. Here are the rest of the SGLI rates.
No longer in the military? Check out Veterans’ Group Life Insurance, which is available to veterans.
Should Military Members Purchase Private Life Insurance?
For most people, the SGLI offers the best prices and features (payment for death due to act of war, automatic disability clause). However, if you do not think the SGLI offers enough coverage, then you should consider purchasing insurance from a private vendor.
Buying a private life insurance policy. Private policies should be considered for those who believe they will need more than a $400,000 policy.
If you need an amount above and beyond the SGLI limits, then you should shop for policies through multiple providers to find the best deals.
One place to start is with USAA, which is an insurance and financial company that limits its membership to military members, veterans and children of USAA members.
Caveats regarding private life insurance for military members. Many private life insurance policies have clauses that do not cover death caused by military actions or during an act of war. Military members need to read their policy carefully before signing the contract to ensure that they are covered at all times, including during an act of war. This is where the SGLI is often better than private life insurance policies – the SGLI covers deaths caused by acts of war and other causes.
Single Military Members’ Life Insurance Needs
The maximum coverage with SGLI costs $24 per month ($288/year), which is a lot of money to spend when you don’t need much if any, life insurance coverage.
If you are single and do not have any dependents, you can get away without any insurance or only the minimum. You can buy a $50,000 policy for $3 per month ($36/year), or add the TSGLI coverage for an additional dollar per month, or a total of $48 per year. A $50,000 policy should be enough to pay off most debts and cover any other expenses.
Remember, military burials are free.
No Dependents, No Life Insurance?
Here is a common situation: You are young and single, or you are a newly married couple where both spouses work (dual income, no kids). Do you need life insurance?
There are two sides to this argument – some say, yes, buy life insurance regardless of whether or not anyone is financially dependent upon your income, and others will say not to bother. As with everything, there are different ways to look at this.
If you are young, you can usually buy a term life insurance policy cheaper now than you can a few years down the road.
The benefit of this is you can lock in lower life insurance rates, and you will already have coverage in place if something were to happen that would leave you uninsurable. (See why term life insurance is almost always better than whole life insurance).
In this case, you can buy a 30-year term life policy while you are young, healthy, and lock in less expensive premiums than if you were to buy a policy several years from now. As your needs change, you can reevaluate your life insurance needs and buy another policy if needed.
You will need to run the scenarios again to determine how much you need and for how long. This method can help you lock in lower life insurance rates now, and buy more life insurance as needed.
Remember, you can always more than one life insurance policy (check with your life insurance provider, as some companies may limit you to one policy).
How you determine what’s adequate for your family is up to you. There are different methods of figuring out how much life insurance your family needs. Ultimately it’s up to you to decide how much coverage is right for your family. The key is choosing the amount of coverage you are comfortable with that will provide your family with what they need for as long as they need it.
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