Life Insurance - Who Needs It and How Much?

Life Insurance - Who Needs It and How Much?

June 30, 2021

They say people protect what they love, so what are you insuring? Well, recent statistics suggest that Americans might be underfunded and under-loved. In 2020, just 54 percent of Americans had life insurance coverage, a significant decline from 63 percent just a decade ago. The research goes into greater detail: there are an estimated 60 million uninsured and underinsured American households, with an average coverage gap of $200,000.

What can you do to protect your loved ones? Depending upon your age and health, insurance can be relatively easy and inexpensive to come by; it's just a question of understanding the goal of insurance, the types of insurance available, and how much you need.

What's the Goal?

While life insurance needs can vary from person to person, consider the most common reasons to pay for a policy:

  • Replace income for dependents who rely on your income
  • To pay for a funeral and final expenses
  • To provide a financial legacy for heirs
  • To pay estate or inheritance taxes
  • To provide a donation to a charity
  • To create a savings vehicle if there is or maybe a future life insurance need

Understanding the motives for considering life insurance will go a long way in helping you to determine which type of insurance to purchase and how much. Don't forget that your insurance needs can change over time and should also be considered when selecting your policy.

Term Insurance

The primary goal of term life insurance is to protect your family and keep their lives on track if you are no longer there to provide for them. It's not an investment vehicle; it's a form of risk management. Just like you build an investment portfolio around a specific risk tolerance and ensure that your asset allocation helps mitigate risk, term life does that for your estate planning.

The reason it's called term life is because the policy terminates after a set period, for instance, 10, 15, 20, or 30 years.  When the coverage ends, the policy terminates.  If you survive the coverage period, yay for you!  If you don’t, your beneficiaries receive the payout. 

Many people choose this coverage when their expenses are at their highest, and so the financial risk to beneficiaries is most significant. Your mortgage balance is big, you're still raising your kids, and all the usual expenses of growing a family are ongoing.

Term Insurance- How Much Do You Need?

It's common to hear insurance should be six to ten times your salary. While everyone likes a quick rule of thumb, a more precise way to decide how much coverage to consider is to break down the expenses you want to cover. Potential expenses you may want to consider include:

  • Salary replacement: [Annual Salary] x [Number of Years]. So, if you make $100,000 and want to replace 20 years of salary, this would be $2,000,000.
  • Mortgage: If you pay this out of your salary, you don't need to add it in again. If you pay this from some other source, for instance, your spouse works and pays the mortgage from their salary, you might want to include it to be on the safe side.
  • Spouse's salary: Will your spouse continue to work? Depending on childcare responsibilities, your surviving spouse may need or want to reduce their work hours. The same calculation as above would apply.
  • Other large debts: Do you still have student loans? Does your spouse? Do you have any other obligation that could become a burden to your loved ones?
  • Education: If you have young children and you would like to encourage education, consider including a reasonable figure for the education costs you would like to cover.

If all of these add up to a number that makes your payments higher than you would like, you can always trim back. But it's a good idea to start with a complete picture of all the costs your family will have to shoulder without you.

Whole Life Insurance – An Estate Planning Tool

Whole life insurance is just what it sounds like: You buy it, and if you pay the premiums, it covers you for your whole life, paying out to your beneficiaries on your death.  Overtime policies begin to accrue a cash value that eventually offsets the "cost of insurance" as you get older, offering the ability to keep premiums constant over the policy's life. Due to the cash value, this type of insurance is sometimes considered an investment.

Because of the investment potential of whole life insurance, a complete discussion of this type of policy can be complicated, and we won't go into it here.  In addition to being useful for people who have some level of permanent need for life insurance, we also think they can be particularly helpful when planning for needs such as:

  • Paying estate taxes: The policy is a good way to ensure your heirs won't have to liquidate assets to pay a tax bill.
  • Special Needs Child: The benefit can be used to help fund care for an adult or minor child that will need ongoing third-party care.
  • Funding a Legacy: A good way to see that organizations you care about can continue their work. The proceeds can create a legacy in your name without affecting the heirs' inheritance or going through probate.

Wrapping it Up

Life insurance is like a parachute; if you don't have it the first time you need it, there is no second chance.  We consider life insurance an important risk management tool to keep your loved ones' lives on track should something unfortunate happen to you. Insurance should be part of your total financial planning picture, and the good news is that it may be more affordable than you think, depending on your age and health.

Of course, insurance products are complex, and understanding which products meet your goals may be unclear.  Working with financial and insurance professionals can help to guide your decisions. If you have questions about your situation, shoot us an email at, we are happy to talk through your options. 

This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal, or tax advisor for specific information pertaining to your situation. Investing involves risk including loss of principal.  Past performance is not indicative of future results.