It’s not much fun to ponder our mortality, or our spouse’s. But once we have children or anyone who depends on us financially, it’s time for some serious adulting.
That means planning for the unexpected. Life insurance helps ensure that if you or your spouse died unexpectedly, your family would be financially stable. (Here’s more on what life insurance is, exactly.)
After figuring out whether you need life insurance, the next question we usually hear is: “How much life insurance do I need?”
There are a few methods that experts commonly use for figuring this out.
The simplest way of determining how much life insurance to purchase is to calculate your coverage based on your annual income.
“The amount of coverage you should get is different depending on if you are single or married,” says Zaneilia Harris, CFP and President of Harris & Harris Wealth Management Group. “I suggest single clients get insurance to cover at least one times their annual salary.” Those who are married with kids, she says, should consider purchasing enough insurance to cover 10 to 15 times their annual salary.
Dr. Brad Klontz, a financial psychologist, Certified Financial Planner and Associate Professor of Practice at Heider College of Business at Creighton University, suggests a slightly lower calculation. “The general rule of thumb is eight to 10 times your annual income,” he says.
Want a slightly more nuanced approach to determining how much coverage to get? Start by looking at various personal factors in your life. “Taking your entire financial picture into account is important,” says Klontz. “How are your kids going to pay for college? What about your mortgage?”
Consider the following numbers as you determine your life insurance needs:
Your current debts (including a mortgage)
Long-term goals, like paying for your child’s education
Final expenses such as funeral costs
Start by totaling these potential costs that you’d want to cover if you weren’t around.
Some of these expenses can really sneak up on you, so it’s good to be thorough. For example, the median cost of a funeral with a viewing and burial runs more than $7,000—and that doesn’t include flowers, the expense of printing an obituary or food for the post-service reception.
Next, think about:
How much income your family needs each year to get by, adjusted for any additional expenses such as extra childcare, health insurance or housekeeping if you weren’t around
How much income your spouse or partner makes
Do the subtraction: How big is the gap between those two numbers? This should lead you to a clearer number for how much money your family might need as “income replacement” on an ongoing basis. (Up to you, but you might choose to build in a little buffer just in case your partner were to experience a period of unemployment, or had to take a job with less pay down the line.)
For example, let’s say you make $50,000 a year, and so does your spouse, for a grand total of $100,000. Let’s also say that you are pretty frugal and can get by as a family on $70,000.
If you were no longer around, your family would only make $50,000 total (that’s how much your spouse earns in this example), which means that they’d come up short by $20,000. So maybe you say that your income replacement number is $20,000. Or, if you wanted to build in a little buffer or breathing room, maybe you want to provide them an extra $25,000 or $30,000 a year.
One more thing to consider: If one spouse is a stay-at-home parent or works part-time and doesn’t have access to health insurance through their job, you may want to add more life insurance on the working spouse. This provides a more generous buffer and prevents the stay-at-home or part-time working parent from scrambling for a job with health insurance if the breadwinner were to pass away.
After that, decide how many years you want this “income replacement” money to last. Do you want to provide this for 20 years? Or do you think that your spouse could make do with a five-year runway?
Whatever you decide, multiply your “income replacement” amount by the number of years you want your family to have that extra support.
Add that to your total fixed costs.
Total up what you do have already in the bank:
Your current assets and retirement funds
Now subtract those assets from the total you’ve been working on. This is a general estimate of how much life insurance you might want to apply for.
There are two main types of life insurance to consider—whole and term. Whole life insurance provides a benefit to your beneficiaries no matter when you pass away, so long as you stay on top of your premium payments. Term life insurance, on the other hand, provides coverage only for a particular time frame, like 10, 20 or 30 years. (As a result, term life premiums tend to cost a lot less than whole life premiums.)
If you’re looking at term life insurance and trying to figure out how long you should be covered, this calculation is refreshingly simple: Most experts recommend purchasing coverage that extends until your youngest will have completed college.
If the dependents you’re seeking to provide for aren’t children (think: aging parents or a non-working spouse), you may need a different approach. In the case of an aging parent, you might select a term that you’d expect to last for the remainder of their life. For a non-working spouse, you might choose a term that would last until they are old enough to access Social Security and/or retirement benefits.
Just because a stay-at-home parent isn’t bringing in an official salary doesn’t mean they should skimp on coverage.
“A stay-at-home parent is a major contributor to the household,” says Harris. “That parent is worth at least $60,000 to $100,000 to the household.”
That number may sound like a lot when you’re up to your elbows in dirty diapers, but consider that if a stay-at-home parent were to die, the remaining spouse would need to pay for childcare, housekeeping and pet care, not to mention all the other facets of life the stay-at-home parent may be in charge of, like meal planning and preparation and errand running.
To figure out how much life insurance to get for a stay-at-home parent, tally up what it would cost to farm out all the services the stay-at-home parent provides; according to Salary.com, the financial value of a stay-at-home mom in 2019 is worth nearly $180,000 per year.
From there, you can use the income replacement approach and multiply that amount by 10.
Of course, it will often make sense to go through these thought experiments with your spouse or partner, since they'll be very much affected by the decisions you make. Here's what you should know about shopping for life insurance together.
Besides increasing your peace of mind, purchasing coverage now can have another big benefit: Life insurance premiums rise as we get older.
“Getting insurance while you’re young, before you have major health issues, is key to keeping your costs low,” says Harris.
Purchasing term life insurance is one of the most potent ways to protect your family against the unforeseen. “You don’t have control over when you die or how you die, but you can have a lot of control over how your family is going to experience the impact,” says Klontz.
Fabric exists to help young families master their money. Our articles abide by strict editorial standards.
This material is designed to provide general information on the subjects covered. It is not, however, intended to provide specific financial advice or to serve as the basis for any decisions. Fabric Insurance Agency, LLC offers a mobile experience for people on-the-go who want a easy and fast way to purchase life insurance.
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Fabric Instant is an Accidental Death Insurance Policy (Form VL-ADH1 with state variations where applicable) and Fabric Premium is a Term Life Insurance Policy (Form ICC16-VLT, ICC16-VLT19, and CMP 0501 with state variations where applicable). Policies are issued by Vantis Life Insurance Company (Vantis Life), Windsor, CT (all states except NY), and by Vantis Life Insurance Company of New York, Brewster, NY (NY only). Coverage may not be available in all states. Issuance of coverage for Fabric Premium is subject to underwriting review and approval. Please see a copy of the policy for the full terms, conditions and exclusions. Policy obligations are the sole responsibility of Vantis Life.
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