What is a Chartered Life Underwriter (CLU)?

Visit the directory of CLU credential holders on the American College of Financial Services website.

Visit the American College website to express your concerns.

How much life insurance do you need? It depends on a number of factors, including your expenses, your spouse’s income, and the age of your children.

The purpose of life insurance is to ensure your family and loved ones are financially secure after you die. If you have a family and you don’t have a high net worth, life insurance is an absolute necessity. To start with, dying is not cheap. The average cost for a funeral these days ranges from $10,000-$20,000.

Yet, as with anything in life (or death), there are different types of life insurance to choose from.

The most common types are term and permanent life insurance. Term life insurance offers a payout for someone’s death for a specified period of time (for example, 30 years). Permanent life insurance, on the other hand, offers lifetime coverage and includes a cash value component you can draw from while still alive.

 “Consider what type of coverage to obtain. Term insurance is traditionally less costly than permanent life insurance assuming the insured is healthy. There are benefits to both, and there is a time and a place for both,” said Michael Acosta, CFP, ChFC, CSLP, and Financial Planner at Genesis Wealth Planning.

For most people in most circumstances, term life insurance makes more sense than permanent life insurance. This is due to the massive price difference between term and whole life insurance, with term insurance having a significantly lower premium.

How Much Life Insurance is Enough?

The questions of whether you need insurance and whether to go term or permanent are fairly straightforward and intuitive. What is much less obvious is how much insurance do you need.

According to one industry report, only 59% of Americans have life insurance. More interesting is that nearly half of those people with life insurance are “underinsured,” meaning they do not have as much life insurance as they should.

When you think about how much life insurance you might need, it’s important to remember an important fact.

You’re not insuring your life, you’re insuring your paycheck.

The point of any type of insurance is to maintain the status quo for the beneficiaries. Insurance should not make the beneficiaries better off or worst off (from a financial perspective).

The point of life insurance is to maintain your family’s standard of living in the event of your passing.

Unless you have a trust fund or have achieved FIRE (Financial Independence / Retire Early), the largest asset you have in life is your paycheck. When you die, your paycheck dies with you. While at the same time, the following items remain with your family when you die.

• Car payments
• Mortgage/rent
• Grocery bills
• Utilities
• Property tax
• Childcare costs

How much life insurance you need is determined by how many years of your paycheck you need to leave behind to ensure your family does not suffer financially in the event of your passing.

One of the biggest variables is whether you live in a single or dual income household . If you are the sole income provider or the clear breadwinner, you will need more life insurance than if you and your spouse made a similar amount of income.

One rule of thumb is that for single-income households, at least 80% of income needs to be insured. For dual-income households, at least 60% of income needs to be insured.

Another important factor that will help you determine how much insurance you need is how many years’ worth of income do you want to replace.

• The most number of years of income you would want to insure would be enough to replace your income from today until retirement. Remember, you are insuring your income and your income goes away at retirement so it does not make sense to insure beyond that point.
• The least number of years of income you would want to insure would be the number of years until you expect your children to be financially stable. Anything less than this amount could put a financial strain on your family.

Let’s illustrate this with a hypothetical example.

• You live in a dual-income household
• Your current age is 37
• You make $60,000 per year
• Your spouse makes $40,000 per year
• You have one child who is seven years old
• You assume your child would be financially secure by 25 and that you plan on retiring by 60

If you wanted to ensure your income until retirement, you might consider an insurance policy worth $828,000 ($60,000 X 60% X 23 years).

If you wanted to ensure your income until your child is financially secure, you might consider an insurance policy worth $648,000 ($60,000 X 60% X 18 years)

What Do Financial Professionals Suggest About Buying Life Insurance?

We asked financial advisors in the Wealthtender community to offer a tip, suggestion, or questions you may want to ask yourself before buying a life insurance policy. Here’s what they said:

—

The number one decision is ‘how much life insurance do you need,’ followed by ‘how long do you need it.’ Only after you answer those questions should you decide upon things like ‘term vs. permanent’ and ‘which company to work with.’  You can find an independent insurance agent who has access to many of the top companies at https://www.trustedchoice.com/. – Jeremy Keil, Keil Financial Partners

—

There are a lot of heated opinions out there about types of life insurance. Some people think anything but term insurance is a waste of money. Some believe whole life insurance is the solution to everything. In reality, no product is good or bad on its own. Every financial decision has tradeoffs. All financial products are designed for particular purposes. They are good for some situations and bad for others.

So you first have to get super clear on what your needs are. What is the purpose of this insurance? If it is so your spouse can pay off the mortgage if you die, term/temporary insurance is probably fine. If it is to be certain you leave some money to your kids no matter what, then permanent insurance fits the bill. If the purpose might change over time (which is most likely true for all of us), then you want flexibility, like a term policy that is convertible to permanent in the future with no proof of insurability (no medical questions).

Don’t let those with dogmatic, one-size-fits-all opinions outweigh what you decide you need! – Stephanie McCullough, Sofia Financial

—

You want to make sure you are getting insured for an amount that makes sense for you and your situation. Generally, term insurance can be sufficient, or if you are seeking permanent coverage, possibly with a long-term care benefit attached, universal life can meet most people’s needs.

You’ll want to consider what would need to be covered if you were to die unexpectedly tomorrow, identify the beneficiaries of the policy, and look to someone who is not solely making their living on life insurance commissions to help you through this process.

There are two (very rare) times I generally recommend whole life insurance as a retirement income vehicle. If you have trouble saving money, a whole life policy can be an effective tool to act as a forced savings account for the future. If a young person with solid, reliable income is seeking to diversify their streams of income in retirement, a whole life policy can be used to accomplish this in addition to traditional pretax and post-tax retirement savings vehicles.

Building one’s entire portfolio out of insurance products is almost never a wise decision. There would need to be a case where the cost of the insurance vehicles is outweighed by the benefit received if the policy is never needed. Otherwise, traditional investments should be the bulk of one’s portfolio supplemented by sufficient, low-cost term or universal life coverage. – Michael Raimondi, Clarus Group LLC

—

A properly structured, and funded, cash value life insurance policy can be a powerful tool for several purposes, including retirement income. – Sean Polley, Polley Wealth Management

—

How much life insurance is necessary for me? The best answer to that question is what do you want to accomplish, such as leaving a legacy, and/or have paid off, like a mortgage, in the event of your untimely demise. In addition, income replacement, especially for a breadwinner, is crucial, but the number of years needed is different in every situation.

Life insurance as a retirement savings vehicle is a last resort unless other avenues have been exhausted. Cash value is necessary for use in retirement and with most life insurance policies being term policies, there is no opportunity cash value available. – Tim Uihlein, Vincere Wealth

Should You Buy Life Insurance?

Like with any financial decision, it’s important to develop a logical framework to make decisions.

It’s helpful to remember why you buy life insurance which is to provide financial security for your family in the event of your passing and your family losing the income you provide.

“When shopping for coverage, the applicant should confirm that the policy is “non-cancellable,” meaning that once the coverage is obtained and paid for that the insurance carrier cannot cancel the policy contract at will,” Acosta said. “It’s a terrible thing to have coverage and then find out that the carrier has terminated your contract unexpectedly. You also want to make sure that the insurance carrier has a strong rating and is financially sound. You’d hate to own a policy where the carrier goes bankrupt.”

How much life insurance you need will be dependent upon how many children you have, whether you have a spouse that is working, whether your spouse would want to continue working, and at what age your children will become financially secure.

The factors discussed in this article are some but not all of the variables that need to be considered for you to choose the optimal amount of life insurance.

To know the exact amount of insurance you need, it’s best to sit down with a financial planner you can trust that will walk through all of your specific details and provide an unbiased assessment of your insurance needs.

Do you have life insurance? What factors did you consider when choosing how much coverage you paid for?

What to Read Next:

• How Much Does a Financial Advisor Cost?
• What is a Certified Financial Planner?

Refer to this list of popular financial certifications prepared by Wealthtender to help you learn more about each designation. You’ll find a brief description of each certification, plus links to in-depth articles if you want to learn more about a particular designation.