How Much Life Insurance Do I Need?

By June 22, 2016Insurance

Life insurance is ultra important.

Think about it, if you pass away, how will your family survive? How will your income be replaced? How will your funeral be paid?

Having life insurance in place is an essential part of financial planning and leaving your family secure.

“A good man leaves an inheritance to his children’s children, but the sinner’s wealth is laid up for the righteous.” – Proverbs 13:22

Now, one of the most daunting questions in relation to life insurance is,

How much life insurance do I need?!?!

There are varying opinions from “financial experts” all over the media, but today I want to go through why you need life insurance, the various options available, how to obtain life insurance, and how much life insurance you REALLY need.

Let’s dig in!

Life Insurance Pinterest

Who Needs Life Insurance?

Does everybody need life insurance? In my opinion, no.

However, the majority of people do, but unfortunately, the majority of people have none. This is the case for a lot of things, however. Most, if not all Christians should read their bible EVERY DAY but we don’t always do the things we should.

This being said, there are some specific groups of people who I believe without a doubt NEED life insurance.

  • Married Couples

Many people mistakenly think that if they don’t have children, there’s no need for life insurance.

Wrong.

What happens if one of you dies tomorrow. Will debt be paid, what about the rent/mortgage/utilities/everything else that life throws your way.

  • Married with Children

Life insurance becomes even more important when you have children.

You need it for all the reasons married without children people need life insurance, except the reasons you need it, are compounded even more when children come into the picture.

Life insurance makes sure that your plans for the future don’t dissipate when you pass.

  • Single Parent

A single parent has a hard job.

You’re the breadwinner, cook, caregiver, mom, dad, just about everything.

Unfortunately, according to Fox Business about 70% of single parents had NO life insurance.

Yikes!

With the amount of responsibility on your shoulders, it becomes even more important to have insurance in place for when you pass.

  • Retired

Retired people need life insurance the least. However, that’s only if they’ve built up their assets enough to take the place of insurance.

However, life insurance is important to pay for estate taxes, funeral costs, and other debts without having to spend down other assets.

Why do You Need Life Insurance?

There are a million and one reasons to have life insurance.

Here’s a few:

  1. Life insurance can provide “income replacement” so that your family can continue to pay everyday expenses.
  2. Life insurance could cover the support payments that a divorced parent makes.
  3. Life insurance would cover the cost of paying for services the parent does for “free,” such as child care.
  4. Life insurance can make sure the child will have financial support no matter when a parent dies.
  5. Life insurance could cover the cost of the debt.
  6. Life Insurance can cover mortgage payments, so your family doesn’t have to move if you die.
  7. Life insurance can pay off business debts if you die, help heirs to the business pay off estate taxes, or fund a buy-sell agreement that allows a business partner to buy out your share.
  8. Life insurance can provide funds for heirs to pay estate or inheritance taxes.
  9. Life insurance can provide a small inheritance to heirs if you have a low net worth.
  10. Life insurance policies can pay for your funeral and final expenses.

Not only do you need life insurance for these reasons, but a case could be made based on verses in the Bible.

Bible Verses on Life Insurance

Now, I’m not saying the bible specifically says you SHOULD have life insurance. But, there are a few verses that deal directly with leaving things for your heirs and having protection for them.

“A good man leaves an inheritance to his children’s children, but the sinner’s wealth is laid up for the righteous.” – Proverbs 13:22

“But if anyone does not provide for his relatives, and especially for members of his household, he has denied the faith and is worse than an unbeliever.” – 1 Timothy 5:8

What Types of Life Insurance are Available?

Just as there are a million and one reasons to have life insurance, it seems there’s an equal amount of different types of life insurance.

In reality, however, it comes down to two basic categories for life insurance, permanent or term:

Permanent Life Insurance Policies

Permanent insurance more often than not has two components. A death benefit and a cash value component.

The cash value in a permanent policy grows on a tax-deferred basis, meaning there are no taxes due on the gain until the money is withdrawn. This allows the cash to grow and continue to compound upon itself exponentially.

Permanent policies are as their name suggests, permanent. So, as long as one is paying for the policy, or the cash value is built up large enough to cover the premiums, it will stay in place until the policyholder passes away.

Generally, these plans are designed to cover needs that are much longer-term and are most often used in estate planning.

There are three main types of permanent life insurance:

  • Whole Life Insurance –  This is the most popular kind of permanent policy and is it features a standard death benefit along with an investment piece also known as a savings account. The savings account grows along with deposits from your regular premiums from the dividends paid into the account by the insurance company.
  • Universal/Adjustable Life Insurance –  These policies are similar to Whole Life Insurance but typically offer a larger amount of flexibility as far as premium payments go. Many, not all allow you the opportunity to increase or decrease the death benefit.
  • Variable Life – Variable Life is somewhat similar to whole life, except you can take the money in the savings portion of the insurance and invest it in stocks, bonds, money market accounts, and mutual funds. This is riskier and you need to make sure you have a good understanding before deciding to purchase a policy.

Term Life Insurance Policies

Term life insurance is the type I prefer and recommend most often.

With a term life insurance policy, you receive a pure death benefit in return for the premium payment you make. For the most part, that’s pretty much all there is to it.

There’s no investment or cash value component. Which, in my opinion, is how it should be for the majority of people. There’s little reason to use insurance for investing purposes other than annuities. A life insurance policy should be a life insurance policy, and investments are investments.

Term life insurance is as the name suggests, sold for terms. The terms range, but go anywhere from 10 – 30 years, although you can get some that are shorter and longer.

Because term life insurance is strictly a death benefit, and for a certain period of time, it’s often MUCH cheaper than permanent life policies.

When a term policy expires, as long as the insured has held the policy through its complete period, the person will have to re-qualify for another policy at their current age and health rating. One of the problems with term life is if you plan to re-qualify for insurance after your term is up, you could have to pay more due to your age and also your health condition. Also, depending on your health condition you could become completely uninsurable.

Term life is designed to be temporary, but if you buy term, and invest the rest, by the time the term is up, you should have enough investments elsewhere to take care of any needs for when you pass.

A term policy can be purchased to cover a mortgage, cover the cost of a child’s education, or just to cover your income should you pass.

There’s a few different types of term life insurance, but the main ones are:

  • Convertible  Convertible policies allow the insured the option to convert from a term policy to a permanent policy at some time in the future. The conditions of the policy and premium payments must have been kept, however.
  • Renewable – Renewable policies allow the insured to renew at the end of a term without a medical exam or a new application.
  • Decreasing – The death benefit decreases over time with a decreasing term policy, until it reaches zero and ends. This is great for say a mortgage.
  • Increasing – Increasing term coverage has the death benefit increase over time, however, the premiums often stay the same.

How are Life Insurance Rates Determined

There’s quite a bit that goes into how premium rates are decided for life insurance rates, but here are 6 ways:

  • Applicant’s Age – A LARGE part of how a life insurance quote is derived is based on the age of the applicant and how much longer they’re expected to live.
  • Applicant’s Health Condition – The health of the applicant helps life insurance companies decide how much risk they are taking in providing a death benefit. There are many factors involved in deciding how much to charge an applicant based on health. A few of the major ones are gender, age, height, weight, overall health history, family health history, and is the applicant a smoker/non-smoker. Whether you do any dangerous activities or have drinking problems also go into deciding how to rate the insurance premium.
  • Death Benefit – The death benefit, also known as the face amount is a primary factor in deciding the cost of the insurance. The higher amount of coverage you select for the face amount, the higher the premium will be.
  • Insurance Company – The actual insurance company has a lot to do with how the premiums are priced. Policies can often be the exact same, but depending on the company, the rates can vary widely. Insurance companies also deal with things differently than their competitors, for instance, different insurance companies rate different health problems more favorably or less favorably which can change the cost.
  • Type of Policy – Whether the policy is permanent or term can greatly impact the cost of the insurance. For example, a term policy will almost always be cheaper than a permanent policy simply because the term policy is for a shorter period of time and has fewer benefits.
  • Riders – There’s also sorts of riders that can be placed on a policy allowing you to include children in the policy or other various benefits. These often cost money and can cause the rates to increase.
  • Face Amount – The face amount of the policy is a BIG decider in how much the policy will actually cost. The larger the death benefit will be can also be a deciding factor in how large the premium will be. You have to pay more to get more.

So, how much life insurance do I really need?

This is a difficult question without having more details on your life.

I will, however, give you my general recommendation as far as life insurance goes. In general, I take a similar stance as

In general, I take a similar stance as Dave Ramsey and suggest 10-12x your yearly salary.

If you’re the primary source of income in your household, then your spouse and kids need to be taken care of for a long time if something happens to you. Making sure you have plenty of coverage will allow them to live comfortably and maintain their lifestyle until they figure out the next step in their lives.

By investing the insurance proceeds, you can earn a rate of return that replaces your lost earnings and provide security. Just as important, don’t forget to get coverage for both spouses. Even stay-at-home parents often need to have term life insurance.

You don’t purchase life insurance for yourself, you purchase it for those you leave behind.

Yours in Ambition,

Cooper Mitchell

Author Cooper Mitchell

Hello, I'm Cooper. I am the President of Dane Financial, LLC. I specialize in helping Christians who have ambition prepare for life through Comprehensive Financial Planning and Investment Management. When I'm not doing financial planning, you can find me focusing on other entrepreneurial pursuits, spending time with my beautiful Wife, worshipping Christ, blogging, lifting (somewhat) heavy weights, and reading non-fiction.

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