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Financial Planning,Life Insurance

How Much Life Insurance Do I Need?

The Bible is pretty silent when it comes to life insurance because, well, it didn’t exist back then.  Instead it was incumbent upon the family and community to help provide for survivors as needed.  God was the insurance plan.  That sounds great on some levels, but there is also a lot of peace of mind knowing that we can purchase insurance so that our families don’t become dependent on others if something happens to us.

How much coverage do you need?  What type of policy should you purchase?  Where should you begin shopping for coverage?  While ultimately I recommend you getting personalized advice from a financial planner, here are some thoughts that can help you sort through some of the confusion.

What’s the point?

The first step in determining the right solution for life insurance is identifying the purpose for the coverage.  In a broad sense, your life insurance need will either be permanent or temporary.

A small percentage of people will have a permanent need of life insurance for things like estate liquidity or funding buy/sell agreements.  This is when permanent life insurance (whole, universal, or variable) makes sense, when the need for insurance likely won’t go away.  This type of need is very particularized, so if you think this is you, much of the following advice may not apply.

Most folks, however, are insuring their income stream so that if something happens to them their families will be provided for financially.  This is a temporary need of coverage, because once you reach retirement age you are likely to not need the coverage anymore.  Term insurance was created just for this type of situation.  It is  much less complex and also much more affordable than permanent coverage.

So before you start shopping for a life insurance policy, know the point of the coverage as it will guide the overarching process.

Life Insurance Rules of Thumb

While every situation is different, there are several rules of thumb that can be a good starting point for determining the right term and amount of coverage.

  • 10 times your annual salary – A policy that is worth 10 times your annual salary is a good starting point.  If invested appropriately, this will often enable you to withdraw your after-tax salary amount from the proceeds while reducing the principal slowly over time.  This rule of thumb isn’t likely to over-insure you.  In fact, it might not be enough, particularly if you are behind on retirement savings or have a long way to go until retirement.
  • DIME formula – The DIME formula is a more customized strategy that takes your various financial goals into account.  I find that it is more likely to over-insure compared to other calculations since the hope would be to cover the other financial goals with your lifetime income anyways.
    • Debt – Add up your non-mortgage debt including student loans, car loans, etc.
    • Income – Decide how many years your family will need income for and multiply your salary times that amount.  This might be until your youngest child graduates high school.
    • Mortgage – Determine the amount you need to pay off your mortgage.
    • Education – Calculate how much you need to set aside for college and other education goals.
  • If you’re single without any kids, you may not require any life insurance if you have enough money to cover your final expenses
  • If you’re retired and/or are financially independent, you likely don’t need to replace an income stream and life insurance will be more of a peace of mind investment.
  • Each of us will also have a different “risk tolerance” when it comes to the amount of insurance we purchase.  So feel free to take these rules of thumb and adjust them upwards or downwards.

Finding the right policy

Once you’ve identified how much coverage you will need, you can match the term to the number of years you expect to need coverage.  If you are 30 and want to be financially independent by age 60, a 30 year level term policy could be a great fit.  You likely won’t need as much insurance when you’re 50 as when you’re 30, so if cost is a factor then you could layer your policies.  For example, instead of buying a $1 million 30-year level term policy, you could consider a $500,000 30 year level term and a $500,000 15-year level term policy.

Finding the best rates

Shop at an online broker such as  They will compare several different insurers and will help you find the best rate that matches your desired coverage and specific medical profile.  They receive a cut back from the insurance companies and you won’t pay them any extra.  Often this is a great way to find a reputable insurer you wouldn’t have otherwise considered.

Mistakes to avoid

  • Confusing insurance with investments – Unless you have a permanent insurance need, I would generally avoid permanent insurance vehicles like whole life, variable life, and universal life.  These can sometimes work out well, but are usually just expensive ways to provide temporarily needed insurance coverage.
  • Buying life insurance from the company you’re most familiar with – We’re often swayed by the lure of the familiar.  This is true when shopping for cars, phones, and life insurance.  Your insurance company may be the best option, but I certainly wouldn’t assume it.  Life insurance is a commodity and you can often save thousands of dollars by shopping around.
  • Underinsuring – We don’t like to think about life insurance because it reminds us of our mortality.  It goes in the important but not urgent bucket and is easily put off.  Don’t assume your company’s insurance policy will be enough to provide for your family.  Term life insurance can be relatively inexpensive, and it’s one area I don’t recommend skimping on.

Ultimately there is no “right” amount or type of life insurance.  The future is uncertain and stewardship doesn’t entail knowing the future, whether we will die tomorrow, live to age 100, or see Jesus come back soon.  Stewardship does entail providing for our families as well as taking care of widows.  That is something that life insurance can help us do today.

If you want more information or would like a customized quote, give us a call.  We don’t sell insurance, but are very familiar with the products available and can help you get the right coverage for your unique situation.