HOW MUCH TERM LIFE INSURANCE COVERAGE DO YOU NEED?
Don't pay for more coverage than you need. Maximize your life insurance policy by choosing the right coverage amount and term length.
Term life insurance is pure life insurance, plain and simple. Choose a term length, a coverage amount, and pay your premiums until the end of the term or the unfortunate end of your life.
For so simple a policy, determining the right amount of coverage may feel like a balancing act. On one hand, you want your policy to be affordable and to fit into your budget. On the other, you also want to leave your loved ones enough cash to cover their living expenses after you’re no longer around to provide for them.
There’s a rhyme and a reason to determining how much term life insurance coverage you need. Read our guide below to learn how to find the perfect amount of coverage for you and your family.
TERM LIFE INSURANCE COVERS YOUR FAMILY IN THE PRIME OF YOUR LIFE
In contrast to whole life insurance, term life isn’t permanent. Term policies aren’t in force for your entire life, even if you live to your eleventy-first birthday, much like Bilbo Baggins.
Yet term life insurance is one of the best ways to protect your family’s financial well-being.
Because the coverage it provides outweighs the affordable premiums you need to pay to keep the policy in place.
Depending on your circumstances and needs, a term policy can provide up to $10 million of coverage for anywhere from 10 to 30 years.
Term life is best purchased the younger and healthier you are (it’s how you’ll get the most affordable premiums!). You should buy term life insurance during the prime of your life — when you’re well on your way to establishing your life, building your savings, and maximizing your income.
The prime of your life is also when you and your family are most financially vulnerable. In fact, according to LIMRA, four out of 10 families with children under 18 would have immediate financial trouble if the family’s breadwinner were to pass away.
Term life insurance is designed to cover expenses and debts you’ve incurred before you’ve had the time to pay them off yourself. You should consider buying term life insurance when you:
- Buy a home
- Get married
- Have children
- Have accumulated significant debts (like student loans)
What would happen to your family’s income if you were to pass? There’d be a sudden drop of a substantial contribution to the family’s financial stability. And expenses wouldn’t halve simply because you’re not around, either. In fact, according to LIMRA, expenses would only decrease by 20 percent.
Term life insurance offers a way to nullify your family’s loss of income if you pass during your prime earning years, before you’ve built up your assets and paid down your expenses.
In a best-case scenario, you outlive the term of your policy. If you do, you’ll likely have paid down your debts and increased your income and savings. Worst case? You’ve insulated your family from excessive expenses and a sudden loss of income.
But exactly how much coverage do you need to best protect your family? Let’s figure that out!
HOW MUCH TERM LIFE INSURANCE DO I NEED?
It’s often recommended to purchase a term life policy with coverage equivalent to five to 10 times your annual salary, at least. Other industry professionals recommend shying away from such general advice.
Everyone’s situation is different, so it follows that everyone’s insurance needs are, as well. Your friend may earn the same salary as you and have similar expenses and debts, but also has a two million dollar inheritance tucked away in savings and investments.
So how much coverage do you need?
Here’s how to calculate how much term life coverage you’ll need:
- Multiply your salary by how many years you’d like to replace your income.
- Add your total expenses, including mortgage payments, debts, credit cards, student loans, etc.
- Add the cost of final expenses.
- Determine how much you’d need to set aside to save for college for your children.
- Subtract any savings or liquid assets you’ve accumulated.
- Subtract any existing life insurance coverage, such as group life from your employer.
Let’s explore an example scenario. Mike is a 30-year old male who:
- Is married and has two young children, ages one and three
- Earns $50,000 per year
- Owes $300,000 on his mortgage
- Has a combined debt of $90,000
- Would have final expenses of $8,755
- Has $10,000 in savings
- Is covered by $100,000 of group life insurance from his job
And let’s not forget the cost of college for Mike’s two young kids. A ballpark cost to earn a Bachelor’s Degree from an in-state college is nearly $57,000.
Mike would like his policy to provide income replacement until his children have both turned 18, at least. So, Mike would need a policy that replaces his income for 17 years.
Mike would therefore need to calculate:
(17 x 50,000) + (300,000 + 90,000 + 8,755 + (57,000 x 2)) - 10,000 - 100,000 = 1,252,755
(Years until his youngest child starts college x annual salary) + (mortgage balance + combined debt + average cost of funeral expenses + average cost of tuition for both children) - total savings - total cost of existing life insurance coverage = total coverage needed
A term life policy for Mike would need to provide a death benefit of at least $1,252,755.
Alternatively, online calculators, like the one provided by Life Happens, will help you easily determine just how much term life insurance you’ll need.
HOW LONG SHOULD MY TERM LIFE INSURANCE COVERAGE LAST?Unlike whole life insurance, term life isn’t permanent. As its name implies, term life insurance is only in force for a given period of time — the term.
With policies that last for 10 to 30 years, which term is the right choice for you?
That depends on your age. The younger you are, the more affordable a term life insurance policy is. (You’re also more likely to health qualify for one.) On the other hand, you’ll likely want a longer term the younger you are.
You also need to consider your unique circumstances. If you’re still in the entry level of your career, it’s likely you’ll be earning more in five or 10 more years. As your income rises, your debts will likely decrease.
If you manage your finances well, your debts should be paid off or nearly paid off by the time your term life insurance completes its coverage period. With your children now adults and some savings tucked away, you’ll no longer have a need for such a beefy insurance policy.
There are two main factors that contribute to determining how long your term life insurance should last:
- The length of your mortgage.
- How long until your children become adults.
The duration of your term life insurance should remain in place until your mortgage is paid off and your children are no longer dependents. At these points, your largest expenses and concerns will have faded away. You’d likely be able to pay off any remaining debts with your income, savings, and assets.
The length of your policy should be slightly longer than you think you’ll need. The reasoning for this is sound. Simply put, at the end of your policy’s term, you’ll have the option to renew it at rates equivalent to whatever age you are. So your affordable premiums might become astronomical (or at least not budget-friendly).
If you didn’t choose a long enough term, you might be in trouble. Or, if your major financial obligations are paid down but you still want life insurance coverage (you should), you can convert your term policy into a smaller whole life policy.
PROPER PLANNING PROTECTS YOUR LOVED ONES
Term life insurance protects your family from financial hardship at a time when they’re most vulnerable. Losing you while you’re young can be devastating enough without the sudden loss of income and a lack of savings to fall back on.
You’re only healthy until you’re not, and you never know what tomorrow brings. Plan for your future with a term life insurance policy that gives your family all the coverage they’ll need. They won’t be able to bring you back, but at least they’ll have a lasting reminder of your undying love and protection.