How Much Life Insurance Do You Need?

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 financial 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? And if So, How Much?

Life insurance has only one purpose: to complete your financial responsibilities if you die. That’s it. Don’t fall for a common trap: life insurance is not an investment. The point of life insurance isn’t to provide you with money for retirement or any other purpose. It’s supposed to be a way for you to help your family or anyone who relies upon your income or the value you provide. You don’t need life insurance if you have no dependents or anyone else that relies on your income or the value you provide.

Other Considerations

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 military Survivor Benefit Plan, then you may be able to decrease your life insurance policy if your spouse will have your pension. If a mortgage is your only debt, then you may consider a mortgage life insurance policy if you feel it would be beneficial to your family, though term life may be a better value. 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.

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 (e.g. primary income earner) or the value you provide (e.g. stay at home spouse, business partner)
• 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
• You need to provide long-term financial support for a special needs child or another family member

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.

Single Military Members’ Life Insurance Needs

The maximum coverage with SGLI costs $25 per month ($300/year), which is more than you need to spend if you don’t need much, if any, life insurance coverage. If you are single and do not have any dependents, you may be able to skip life insurance or only purchase a small policy. For example, you can buy a $50,000 policy through the SGLI for $3.00 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 buy more than one life insurance policy (check with your life insurance provider, as some companies may limit you to one policy).

Which Type of Life Insurance Should You Buy?

The argument typically comes down to whole life or term life. The difference is whole life lasts for the person’s entire life, while a term life insurance policy only lasts for the “term” of the policy (often issued in 10, 20, or 30 year periods).

Term Life Insurance

Term life insurance is often recommended for most common life insurance needs. Term life insurance premiums are less expensive for the same value policy as whole life insurance. And most people don’t need a life insurance policy for their entire lives. If things work out well, your need for insurance will often decrease as you age, because fewer people rely on your income to support them. Many people find they can go without life insurance after they reach a certain stage in life, often at or near retirement. Before that, their financial needs are often greater – paying for their mortgage, supporting a family, school and college expenses, saving for retirement, etc. But financial needs are often less once children have left the home, the mortgage is paid off, and you are no longer saving for retirement. A Term life policy is a good solution for life insurance needs that follow this path.

Whole Life Insurance

Whole life insurance, on the other hand, lasts for your entire life, provided you are current on your premiums. There are a couple of downsides to whole life insurance, and it often gets a bad rap. But there are also times when it is the best form of life insurance for a specific person or situation. First, the downsides – whole life insurance premiums are significantly more expensive than term life insurance premiums for the same amount of coverage. Second, many life insurance salesmen peddle whole life insurance as an investment. It’s actually not a good investment. Life insurance and investing should never be mixed. Life insurance should only be used as life insurance. On the plus side, whole life insurance is good for situations when you will need the life insurance premium for your heirs, regardless of your age when you pass away. Two common situations were mentioned above – caring for a special needs dependent and for estate planning. These are situations when the higher life insurance premiums are worth paying for the permanent policy that never expires.

Should You Purchase Additional Life Insurance Riders?

In addition to determining whether it makes sense to have a life insurance policy, consider various riders as add-ons. While these will increase the monthly cost, they can provide valuable coverage.  Here are a couple of riders you might want to consider:

• Long-Term Care Rider: Long-term care insurance allows you to access your death benefit to cover the cost of things like nursing home care, assisted living, or in-home care.
• Accelerated Death Benefit: This allows the policyholder to receive a portion of the death benefit early if they’re diagnosed with a terminal illness. However, it’s important to understand that you may need to pay taxes on the benefit amount.
• Waiver of Premium: If the covered individual becomes disabled due to a covered reason, the insurance company will cover the premium costs while disabled.

Where Military Members Should Buy Life Insurance

Servicemembers have the option of buying a government-sponsored life insurance policy, or they can buy a policy through a private insurance company. Military members and veterans have special options not available to the general public, including the government-sponsored SGLI plan, available to current military members, and the Veterans Group Life Insurance plan, available to veterans. Let’s look at these in more detail.

SGLI – Servicemembers’ Group Life Insurance

The Servicemembers’ Group Life Insurance (SGLI) program is a great option for most military members because it offers affordable group life insurance to all servicemembers regardless of their age or health status. Additionally, it 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 Service Member’s Group Life Insurance program offers troops insurance coverage of $500,000 for only $25 per month. Here are the rest of the SGLI rates. The biggest downside is that your SGLI policy ends shortly after you leave military service. No longer in the military? Check out Veterans’ Group Life Insurance, which is available to veterans.

Veterans Group Life Insurance

VGLI is available to veterans. You can convert your SGLI policy to a VGLI policy. However, premiums are based on your age and increase substantially as you get older. For most people, VGLI is only good as a temporary option while you transition from military service, or as a last-case policy if you can get life insurance elsewhere.

Non-Government Life Insurance Policies

SGLI offers the best combination of rates and convenience for most active duty servicemembers. However, it’s a good idea to look into a life insurance policy from a private vendor. This can provide additional coverage if SGLI isn’t sufficient for your needs. It also gives you access to a life insurance policy you can take with you after you leave military service. Buying a private life insurance policy. Private policies should be considered for those who believe they will need more than a $500,000 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. Learn more about USAA membership, get a life insurance quote here, or read our USAA review.

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.

Converting an SGLI Policy to VGLI After Discharge

Many active military members choose to have an SGLI policy. They’re inexpensive and provide the perfect amount of coverage. However, once you leave the service, you’re required to convert your policy to a VGLI. However, there are some guidelines you need to be aware of to make the transition smoother.

• You can apply for VGLI coverage within 1 year and 120 days (a total of 485 days) from your date of separation or discharge.
• If you apply within the first 240 days after leaving the service, you can convert SGLI to VGLI without having to provide evidence of good health or undergo a medical exam.
• If you apply after 240 days but within the full 1 year and 120-day period, you will need to provide proof of good health as part of your VGLI application.
• If you miss the 1 year and 120-day window, you lose the right to convert to VGLI.
• The maximum VGLI coverage available is equal to your SGLI coverage at the time of separation.

Periodic Review of Your Life Insurance Policies

Most people will sign up for a life insurance policy and never look at it again. Like many other financial products, your life insurance should be renewed every three to five years, or after a life-changing event (such as marriage, childbirth, divorce, etc.).  Periodic reviews of your policy help you understand if you still have the right amount of coverage. For example, maybe your income has increased, or you purchased a more expensive house. Or maybe something happened in your life and you now have additional debt. Because things are always changing, it’s important to do frequent reviews to ensure you have the right policy in place.

Bottom Line

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.