How much life insurance do you really need and when do you need it?

How much life insurance do you really need and when do you need it?

Life insurance is one of the most important financial decisions you make when you have others depending on your income production. Typically, the first big impetus to purchase a life insurance policy is marriage or your first child, but it really just comes down to if someone is depending on you or not.

When you are single and have no dependents, there is typically no need to have a life insurance policy. At least, no necessity. Reasons to purchase a policy as a single person might be to provide funds for a funeral or pass on extra security to family or friends, but if they are not counting on you for their well-being than that is simply a personal choice, not a requisite. When should you prioritize life insurance? Once you get married and you both become accustomed to a certain financial lifestyle, it can make sense to backstop that lifestyle with life insurance. This will provide the surviving spouse with the funds they need to maintain that way of life if they cannot do so without the deceased’s income contribution. The other, and more vital, life moment to purchase life insurance is once you have kids. Children can be very expensive to raise, and the lost income of a producing spouse can certainly hinder the ability to not only maintain the lifestyle you became accustomed to, but also pay for those large future costs such as college. While you hope to never utilize the death benefit of life insurance, the peace of mind you will gain from knowing your loved ones will be taken care of can be priceless.

So how much life insurance should you buy? The key here is to think in terms of how much annual income the life insurance proceeds will generate. There is no one-size-fits-all, and there is no magic number for your age. If you maintained a $1M Term policy, that million dollars would reasonably generate $30K- $50K annually in a fairly conservative investment portfolio. Is that enough to fill your surviving spouse’s income gap? For a $2M death benefit, you would be assuming annual income of $60K to $100K. Remember, even if one spouse does not work, there are still financial gaps that will need to be filled. If one watches the kids, now you may have to pay a third party to do so.

Which insurance is better, term or permanent? This is a personal decision, but term is the most efficient way to fill the need. You can get a high dollar amount of coverage for a relatively low premium. A common course of action might be to get 20 or 30 year term coverage, so that when your children are grown up and able to support themselves, an insurance windfall is no longer necessary. 
 
The bottom line? When you find yourself in a position of support for other loved ones, ask yourself what would happen tomorrow if you were no longer around to provide for them. #lifeinsurance

-Your friends at Red Oak Financial Group