Starting your own family is exciting and a joyous time of life, but one that’s not without its own challenges and realities. One of those challenges and realities is the uncertainty and fragility of life itself and the need to provide financially for your family if something were to ever happen to you. Fortunately, this is a scenario that life insurance is really good at solving, but there tends to be a lot of confusion and stress around buying enough coverage to fulfill your needs while also shopping for the best price possible. The one question we frequently get from clients is “How much life insurance do I need for my family? To which we typically respond with, "well, what do you want to have happen for your family if something were to happen to you"? The answers vary dramatically, but they often include: I'd want my family to be okay, I'd want my kids to be educated the way I would have provided for them, I’d want my spouse to not worry about the mortgage or retirement, or I'd want them to live the way I would have provided. Once you get clear on what it is you want to achieve, you can begin to quantify that amount and determine what you need. While each family’s situation is unique, and there is no “one size fits all” solution, this article will give you a framework and some structure to help you answer these questions on your own.
How much life insurance do I need for my family?
There are a number of important considerations to take into account when deciding how much life insurance coverage you need for your family, including:
Debt - Take stock of any debt you have that you’d want to be paid off in the event of your death. Examples include your mortgage, credit cards, and car loans, among others. Note that federal student loans (not private) are discharged upon your death and would not fall on your heirs’ shoulders. Also note that if you live in a community property state, your spouse may be required to assume responsibility for debt obligations that are in your name only if the debt was taken out during your marriage.
Capital Needs - What big funding goals do you have? Maybe you want to pay for your kids’ college education or make sure your spouse will have enough money to retire on their own. Maybe you just want to provide enough financial support for your family until the kids are grown. Whatever your large funding goals or needs are, they should be factored into your life insurance needs equation.
Assets - Take stock of all assets you and your spouse own that can be easily liquidated. If you own a home, this should generally be left out of the equation if you expect your family to continue living in the house, but you should include assets like your bank accounts, retirement accounts, other life insurance policies, etc. If either of you owns a business and has a business partner(s), make sure that any existing buy-sell agreements are included in your assessment as well.
Income - What does your current income picture look like? Are you the primary breadwinner? What impact would your death have on your spouse’s ability to maintain their lifestyle and provide for your kids? Do you have annuities or rental properties that could provide income in perpetuity? All current income and future income potential should also be considered in your life insurance needs assessment.
While this is by no means an exhaustive list of everything you might need to consider, it is a good starting point for taking inventory of your life and your current financial picture. Below is an example of what your life insurance needs assessment might look like.
How should I go about purchasing a policy?
Once you’ve assessed your life insurance needs, it’s time to purchase a policy. However, with more than 750 life insurance companies in the United States and hundreds of thousands of agents brokering different life insurance products, there’s a seemingly endless slew of companies, agents, and products to choose from. So, how do you find the company, agent, and product that’s right for you?
First, you need to determine which type of life insurance product you need. There are two primary types of life insurance policies: term and permanent. Term policies last for a specific, pre-set period of time while permanent policies will remain in force your entire lifetime. Term policies tend to be the most “plain vanilla”, lowest-cost, and most widely used life insurance product, while permanent policies can come in different shapes and sizes (e.g., whole life or universal life) and vary more in cost.
Second, you’ll want to figure out if you need to add any riders to your policy. Riders are essentially additional benefits that can be added to a basic life insurance policy to provide you with specific kinds of protection or features. A few common rider examples include guaranteed insurability (allows you to purchase additional insurance coverage without further medical examination), long-term care (monthly payments to cover the costs of a nursing home or in-home care), and waiver of premium (waives premiums if you become permanently disabled).
Lastly, you want to shop where or who you want to buy your life insurance policy from. This could be through a life insurance agent you know, your financial advisor, or directly from the insurance company. Life insurance products are generally sold on commission, so if you do buy through a licensed life insurance professional, make sure you work with one who is going to have your best interests at heart and be transparent about their recommendations.
If you go the DIY route, make sure to shop at least a few different companies and their products to find the best fit for you from a cost-benefit standpoint.
There are a few other important considerations to take into account when deciding how much life insurance you should buy. These include:
Age - The older you are, the more costly your life insurance premiums will be.
Health - Pre-existing conditions or diseases can potentially disqualify you or significantly raise the cost of your premiums.
Lifestyle - Are you a smoker or heavy drinker? Do you rock climb or skydive? More hazardous lifestyle choices can increase your premiums (See more on Rate Classes).
Decreasing needs over time - If you make smart choices with your money, your assets will grow over time while your debt will decrease, thereby reducing the dollar amount required to fulfill your life insurance needs.
Bundling - Often, you can buy your life insurance through your property & casualty insurance agent and can get discounts for having multiple lines with that insurer. Additionally, you can often minimize the number of policies you need (and thereby the cost) by utilizing riders (e.g. long-term care) to accomplish multiple coverage goals under one policy.
All of our expert wealth advisers at Forefront Wealth Partners are also licensed life insurance professionals that can help you cut through the noise and make sense of your options. We take a financial planning-first approach and work with many insurance companies to help you find the best solution to meet your needs. Schedule a free intro call today to see how we can help!
Securities and Advisory Services offered through Calton & Associates, Inc., Member FINRA/SIPC. OSJ: 2701 N. Rocky Point Drive, Suite 1000, Tampa, FL 33607 (813) 264-0440. Forefront Wealth Partners and Calton & Associates, Inc. are separate entities.
Calton & Associates, Inc. does not provide legal or tax advice.