How much life insurance do I need?
I don't sell life insurance. I have never sold life insurance. I will never sell life insurance.
When financial advisors start talking about life insurance, alarm bells should start going off in your head. It's almost impossible to sell life insurance and give unbiased financial advice because of the massive commissions that come from life insurance.
There's even a financial incentive to sell what I would consider an inferior product because the commission is higher. According to NerdWallet, "The premiums for permanent life insurance are often six to 10 times higher than premiums for term life insurance."
Whole life or permanent insurance has its place, but for most people it just doesn't make sense. It's much more expensive than a term policy and typically performs very poorly as an investment. When I recommend life insurance to my clients, it's almost always term life insurance.
Term life insurance runs for a specified period of time. If you have a 30 year, $500,000 policy, and you die at any point during those 30 years, your heirs are paid out the full face value of $500,000. There are a few caveats depending on the policy but that's essentially how it works. It's simple and less expensive than other options.
When deciding the amount, it becomes a balancing act between cost and security. To get the "textbook" answer, you have to know how much income you are generating for your family. Let's say you are 45, plan to retire at age 65, and earn $100,000 per year. To replace your income, year after year, you would need $2,500,000 of coverage for the next 20 years.
To arrive at that number we assume that your heirs will invest the proceeds from the insurance and can withdrawal a conservative 4% per year from the $2.5 million.
$100,000 / 0.04 = $2,500,000
Some families want to pay off their home should the primary earner pass away. For that, you would want to add on the outstanding mortgage balance to the amount. The total insurance amount can get quite large. I typically recommend keeping the primary mortgage and making the payment as you would have if you were still receiving regular paychecks.
The cost of insurance typically becomes the limiting factor. It's a balancing act between preparation for the worst case scenario and quality of life now. If you are curious about how much your life insurance would cost or need some help determining the ideal amount for your family, you can schedule a free intro call here: https://tidycal.com/bestcase/intro-phone-call
I may not sell insurance, but I still think it’s incredibly important. That’s why I partner with insurance experts who shop around to make sure you have access to the best policies available.
