Life Insurance FAQs
When should I get life Insurance and for how long of a term?
We typically recommend to our clients who have children that at the bare minimum they should have life insurance through their child-rearing years. If they are just starting a family and plan to have multiple kids, a 30-year term policy is typically sufficient. If they are maybe a little late to the game of having insurance in place, and all of the planned children are already running around, a 20-year term policy will be even less expensive. But that is the bare minimum. If savings rates aren’t high enough for any of a variety of reasons, and it is projected that there won’t be enough in assets once a couple are empty-nesters to have a spouse financially survive the loss of an income producing partner, life insurance is still important to have in place. That can be difficult to forecast decades in advance. It is not uncommon for us to layer another policy in place 5 to 10 years down the line when income has improved, and we can extend the total coverage period.
How much life insurance do I need?
Since the primary purpose of life insurance is to replace income, the starting point in the calculation is not surprisingly, income. But far too often I see people doing calculations based off of gross income. Gross income isn’t what is putting food on the table and paying the mortgage. That would be net income. We recommend a 20x multiple on net income of the income we are insuring. So if you take home 100k a year, you should have a $2 million life insurance policy. This may sound like a lot of money, but keep in mind it is replacing decades of income that the family is relying on, and $2 million doesn’t go as far as you might think it does when you need to make it last that long.
It is also important to insure against the loss of a non-working spouse. If you suddenly find yourself as a single working parent, all of those things you relied on, like child care, cleaning, laundry, meals, are suddenly a new responsibility that may be met in whole or in part by hiring help. Purchasing a smaller policy to address those costs is smart as well.