Topics:buying life insurance
Guest Post by Liana Corwin
There are few things, if any, more important to dads than the security of their families. So as a father or expecting father, you’re probably thinking of all the ways to make sure your loved ones are taken care of. From baby-proofing the house to setting up a college savings account, the list is far and wide.
If you’re like most dads, life insurance is likely also on your list and you may be wondering: how much life insurance do I need?
How much you should buy depends on your goals and budget. In the end, it’s all about figuring out how much risk you can afford to take off the table. You’ll find a lot of calculation methods around the internet to help you figure out how much term life insurance you need — you can even use Ladder’s free life insurance calculator to get you started.
Want to get deeper into the numbers? Here’s a method for picking your term and coverage amount based on the simple but powerful idea of replacing your income.
How many years until you think you’ll retire? That’s your term. The reason why is that until then, you’ll most likely have people counting on your income (for example your spouse/partner and/or kids).
Pick a coverage amount that’s equal to your annual salary multiplied by your term. So for example, if you make $100,000 a year and have 10 years left until retirement, pick a coverage amount of one million dollars. If you have 20 years left until retirement, pick a coverage of $100,000 times 20, or two million dollars.
The multiple is an annuity factor that takes into account average expected future salary inflation and investment returns. Calculating your coverage this way should enable your beneficiaries to invest in a life insurance payout (for example, in a mutual fund) and maintain their standard of living by recouping your lost income each year through investment returns. Of course, that all depends on market conditions.
To make things even simpler, most experts recommend coverage of a minimum of 10x your annual salary. So if you don’t have the bandwidth right now, simply get your 10x in place, and figure out the rest later. Some insurers, like Ladder, offer adjustable term life insurance policies.
If you’d rather think through your goals in more detail, here are three steps to follow:
Why do you want to buy life insurance? Or asked another way, what are you worried will happen (or not happen) if you were to die in the next 10, 20, or 30 years?
Write down your answers and for each of them figure out if money would help mitigate your concern. If so, there’s your life insurance goal. Here’s a list of goals we commonly hear:
I want my family to:
These life insurance goals look a lot like general financial goals for you and your family. That makes sense because the purpose of life insurance is to replace economic value — in other words, you want your family’s financial picture to stay the same, regardless of what happens to you.
Now that you’ve outlined your goals, figure out how much money will be needed to get your family there. For example, how big is your mortgage balance? Or how much money do you think your kids will need to go to college, or for your spouse to retire?
To figure out your life insurance term, or how long you should be covered for, take the longest time horizon from your list.
To figure out your coverage amount, or the size of the payout you’d want to leave behind, add up the total amount of money that will be needed over your term.
Now subtract any savings you already have. Those go towards all the goals you’ve outlined above.
Round things up (depending on what coverage level increments are offered by the life insurance company you choose) and you’ll find what amount of coverage and what term length is right for you.
Now’s a good time for a gut check — does that feel like enough? While the math matters most, your intuition has a role to play in putting your mind at ease. If you’d rather go with the expert gut check discussed earlier, look at this number as a multiple of your income. The ballpark method recommends a minimum multiple of 10 to 12 times your salary, and a term equal to the years you have left until retirement.
Don't worry about getting it all perfect right out of the gate. Get something in place that works for your goals as best you can determine and as soon as possible. If you need additional coverage, you can buy another policy. Or, with an adjustable policy, you can adapt your existing policy over time.
The good news is that term life insurance is likely to be a lot more affordable than you think. Start out by getting a ballpark quote for your ideal coverage and term. From there, there are a couple of ways to go:
If the quote fits in your budget, that’s great. Don’t cut corners if you don’t have to, and enjoy some sound sleep knowing you have everything covered.
If money is tight, here are ways that can help make things fit a little better:
Experts recommend having coverage that's worth 10 times your income. For a more personalized calculation, take a look at your goals and budget. Ask yourself what the money would be used for (mortgage, college expenses, etc.), then add up those costs. If you’re over budget, don’t fret: there are ways to bring down the cost, like having a shorter term. When it comes to life insurance, something is always better than nothing.
Liana Corwin is the Director of Communications and Editor of the Financial Literacy Blog at Ladder, an award-winning insurtech that’s using technology to make life insurance smart, easy, and affordable. Passionate about helping consumers, Liana has spent nearly a decade working with brands that solve hard problems and make consumer experiences delightful.
Sign up below to receive a monthly newsletter containing relevant news, resources and expert tips on Life Insurance and other products and services.