How much life insurance do I need?

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When families sit down to discuss life insurance options, they often ask the same two questions: How much life insurance do I need, and what type of life insurance should I buy?

Like other important decisions families need to make, the answers to these questions are not set in stone. Where some families need permanent life insurance, others may be better off with affordable term coverage and higher death benefits.

Likewise, the amount of coverage a person needs will vary, depending on where you are in your career, your income, and the types of debts and financial obligations you have. Therefore, before purchasing life insurance, you need to consider exactly what you will get from a life insurance policy, and how much it will cost.

When a life insurance policy becomes effective for an individual who dies, the beneficiary of the policy receives a death benefit in the form of a cash payment. Life insurance proceeds are typically used to pay for:

  • Income replacement during the working years of the insured
  • Mortgages, auto loans, and other debt
  • Utilities, groceries and other basic living expenses
  • The cost of childcare or household help
  • Final expenses such as funeral, coffin and cemetery (or cremation costs)
  • Future expenses, such as college tuition and children’s activities

At its core, life insurance provides financial support to your dependents in the event of your untimely death. Ultimately, this means your beneficiaries can spend the proceeds wherever they need to, whether that’s using the money for living expenses or paying for future milestones like college tuition or a wedding.

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The cost of life insurance can vary widely based on a number of factors. These include:

  • your age
  • general health
  • family health history
  • Profession
  • Hobby
  • gender
  • country of residence
  • Coverage
  • Types of life insurance purchased
  • tobacco status

Generally speaking, term life insurance is the most affordable life insurance. This is because, unlike permanent life insurance, a term policy is only good for a certain amount of time, usually 10 to 30 years from the time you purchase the policy.

Term life insurance can even be downright “cheap” in terms of the amount of coverage you can buy. For example, a 30-year-old man in good health living in California can use a company like Bestow to purchase $500,000 worth of 20-year term life insurance for less than $30 a month, while an equally healthy woman Ages can purchase this coverage for less than $20 per month.

The price of permanent life insurance goes up from there — all the way up. Whole life insurance can cost 10 to 20 times more than term life insurance for the same amount of coverage. That means you could pay $400 or more per month for whole life insurance worth up to $500,000.

However, with whole life insurance, your family will receive the policy’s death benefit no matter how long you live, unlike term life insurance that only lasts for a certain period of time. Whole life policies also build up cash value over time, which you can borrow against and it increases over time as you pay your premiums.

If you’re shopping for life insurance, keep in mind that you’ll be able to get a higher rate policy if you lock in your coverage when you’re young and healthy. Prices only go up with age, especially if you end up with a chronic disease or other physical issues that can make it difficult to pass a medical exam.

If you wait until you’re old or in poor health to buy insurance, you may end up having to buy guaranteed life insurance — a policy that’s expensive despite offering a relatively low death benefit.

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When purchasing life insurance, you need coverage of 10-20 times your annual income.

According to Jeff Rose, a financial advisor who writes about life insurance and investing for his website Good Financial Cents, most families should aim for life insurance that is at least 10 times their income.

However, that’s a “minimum” goal, he said, adding that 20 times your income is more in line with how much people should pay for coverage. “This is especially true for young families whose incomes are expected to grow with their careers,” he said.

According to Rose, if you currently earn $40,000 a year, you should strive to purchase life insurance with a death benefit of at least $400,000, but ideally as much as $800,000 or more.

And, what if you make $70,000 a year? That means you’ll need $700,000 to $1.4 million in life insurance. Conversely, a high earner earning $150,000 a year may need as much as $1.5 million to $3 million in life insurance.

While 10 to 20 times your income is a general rule of thumb, you may want to buy more coverage depending on your lifestyle and needs. People who are deeply in debt may want higher death benefits, as do those with multiple children.

If you believe you’ll be making more money in the future, that’s another reason to buy more insurance than you need now. After all, you can get lower insurance rates if you’re young and healthy, and the longer you wait, the higher your monthly premiums will have to be.

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If you're young and don't have a family yet, you may wait to buy life insurance until a later date.

If you don’t think you need life insurance, you’re probably right. If you’re young and don’t have any dependents or debts, you might want to skip insurance for now. Wealthy people can also decide to self-insure, and if you’re retired and have the cash for your final expenses, you probably don’t need life insurance.

Then again, buying life insurance to cover the costs of a funeral or funeral can give your family peace of mind no matter what your age. Or, you can proactively lock in an affordable life insurance rate now anytime, so you can have it later when you need it.

At the end of the day, you can spend a little or a lot of money on life insurance that replaces your income and helps your loved ones avoid financial loss in the event of your death. However, don’t get so caught up in how much life insurance you need that you never invest in the policy. Any amount of life insurance is better than none, and the best policies are the ones you can afford.

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Read CNN Underscored’s guide to the differences Types of Life Insurance.

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