How Much Life Insurance Do I Need? How To Choose Life Insurance

We Break Down How Much Life Insurance You Really Need Because, Adulting

March 9, 2020 Updated June 1, 2020

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While no one likes to think about death, it’s a reality we all need to consider especially when it comes to protecting our loved ones and our assets. Life insurance is one of those necessities of adulting, like retirement planning, that not only provides us with a solid financial plan but also comfort in knowing funds will be available to protect your loved ones in the event of your passing. This becomes top-of-mind if you have kids, elderly parents, or others financially dependent on you and might also be emotional to think about and process.

So how do you figure out how much life insurance you need? And who is life insurance really for? How will your health or any preexisting conditions affect your life insurance rate? We sought out the answers to all your questions so you can arrive at the best decision for you and your family.

What is life insurance?

Life insurance is a contract between an insurer and a policyholder in which the insurer guarantees a designated sum of money to named beneficiaries upon the death of the insured. However, life insurance isn’t solely about your loved ones receiving a big lump of money once you kick the bucket. Life insurance helps to protect your family, whether it’s your partner, parents, kids, or all of the above, in the event of your death so that they’re able to sustain their standard of living if you’re no longer available to offer financial assistance. Life insurance can cover the costs of everything from childcare, to hiring someone to handle household needs, as well as to pay off debts and other expenses, like mortgage and car payments. It can also help with the cost of funeral services, which can be a costly expense for loved ones.

Who is life insurance for?

If anyone relies on you financially, you need life insurance. It’s important to note that life insurance isn’t just for those who are married and/or have children. You might need life insurance if you have any dependents, including an adult sibling, elderly parents, an ex spouse or partner, and a business partner. However, if you’re financially secure and independent and no one relies on you for financial support, then you probably don’t require life insurance. There are many factors at play and if you’re unsure, you could confer with a financial advisor or insurance agent.

If you’re a woman, you shouldn’t underestimate the importance of having life insurance. One survey showed that while both women and men equally believed that their death “would have a substantial impact on their family” only 67 percent of women surveyed said they had life insurance, compared to 79 percent of men.

What is the best age to get life insurance?

It might feel morbid to start thinking about your death when you’re young, but that’s exactly what experts recommend you do. The earlier you sign up for life insurance, the better. That’s because you can lock in the cost at purchase as the plan gets more expensive to buy as you get older. Signing up before 35 is ideal, though most adults don’t purchase plans until later.

How much life insurance do I need?

While the amount of life insurance varies from case to case, most insurance companies recommend coverage that’s about six to ten times the amount of your annual income. Some might even recommend 10 to 15 times the amount of your salary. However, like most generalized suggestions, the amount of life insurance you need is individual and depends on your financial and life circumstances. Basically, you want to figure out that magic number of income you wish to provide for your spouse or other beneficiaries when you die, which will help pay out all necessities, payments, and debts. You will also want to consider any other additional income sources available to you, like retirement accounts, pensions, and Social Security (for your spouse), and subtract that amount from your overall sum.

And while you want to choose the amount that is essential for your unique financial circumstances, it’s better to be safe than sorry and leave yourself a big margin for error. After all, you don’t want to leave your family in a bind after your passing.

Do pre-existing medical conditions affect life insurance?

It’s unfortunate true that pre-existing medical conditions might impact your life insurance rates or lead to denial of coverage altogether. Though each insurance company has their own policy on the issue, Nerdwallet reports chronic conditions like obesity, diabetes, heart disease, high blood pressure or high cholesterol, depression may “raise red flags” with companies. Health issues like cancer could raise your rates or result to a denial. However, if you can show your chronic condition is managed, that might result in standard rates.

What should I know before naming life insurance beneficiaries?

Dealing with life insurance paperwork is confusing enough so you may want to speed through the process. However, one aspect you may want to think through is who and how you name your life insurance beneficiaries. Luckily, the folks at LifeHappens.org have offered three tips to consider.
— Always name a secondary beneficiary just in case you outlive your first listed beneficiary.
— Name a specific beneficiary rather than having the proceeds of your life insurance paid to your estate. This way, the life insurance can be paid to your family immediately instead of going through probate with your other assets.
— Be mindful and specific when naming a beneficiary. Per LifeHappens, “Saying ‘wife of the insured’ could result in an ex-spouse getting the proceeds. Naming specific children may exclude those born later. If your child dies before you, do you want the proceeds to go to that child’s children? Changing the beneficiary designation is easy, but you have to remember to do it.”

All this can get complicated, so a life insurance agent can be a fantastic resource as you’re setting up your beneficiary designation.

Is there such a thing as a life insurance calculator?

There is! If you want to give yourself a leg up before you visit your insurance agent, there are a number of life insurance calculators online that can help you figure out approximately how much life insurance you might need and about how much it will cost. Most insurance companies have them on their websites, like this one from All State or Fidelity.

Should you get life insurance through work or privately?

If you work for a company that offers various benefits, you’ll know that many companies offer free group life insurance through work equal to the individual’s annual salary rounded to the nearest $1,000. Some, however, may offer the opportunity to buy into more life insurance, often three or four times the annual salary.

The question is, should you buy life insurance through work or privately? According to NerdWallet, it depends on how long you expect to stay at the employer. The pros of buying in through work are convenience, ease of acceptance, and a good price. But most people don’t stay with their employer for the entirety of their careers, so you never know when you might switch jobs, how old you’ll be, or if you’ll have developed a medical condition. Shopping around anew for a rate that works for you could pose risks.

Related: I Have Health Insurance, But I’m Still Drowning In Medical Debt