How much life insurance do you need?

family with life insurance

Life insurance can be a difficult topic. It can seem confusing, and maybe even uncomfortable — no one wants to think about the end of their life. However, just because the topic seems hard to talk about doesn’t mean it isn’t well worth doing so. In fact, life insurance is often considered an essential cornerstone of financial planning and is one of the best ways you can protect your loved ones.

At Elephant Insurance, we strive to make the complicated a little less complex. So, to put things simply, life insurance can provide income replacement to your beneficiaries if you were to pass away. This is a very broad description, but don’t worry — we’ll go into plenty more detail below. Read on for an in-depth discussion of what life insurance is, what it covers, who needs coverage and when, and what to consider before making a policy purchase.

What is life insurance?

Just like other, more familiar types of insurance, life insurance constitutes a contract between an insurer and a policy owner. When you purchase a life insurance policy, you agree to pay a premium to an insurance company (Elephant, for example), in exchange for the knowledge that, should you pass away, the company will then pay out that amount as a “death benefit” to your named beneficiaries. This benefit can be paid out monthly, quarterly, semi-annually, or in one lump annual payment, depending on your policy and your preferences.

Who needs it?

If anyone else depends on you for financial support, it’s in your best interest (and theirs) for you to consider an individual life insurance policy. To name a few examples, an individual life insurance policy might be right for you if you are:

Married, with or without children

As married couples generally share their financial obligations, your spouse might need assistance if you should pass away. Your life insurance policy can help them replace lost income, keep up with rent or mortgage payments, or pay off any debts.

If you are married and have children, your life insurance policy can help your spouse and kids continue to live the lifestyle they’re used to after your death. This can mean helping provide for present living expenses as well as for future costs such as college tuition or marriage.

A parent

As a parent, you naturally want what’s best for your kids, both now and later on down the road. Whether you are a parent of minor children, a parent of a special needs adult, or a parent of adult children you would still like to help financially, a life insurance policy can help provide for your children after your death.

A young adult

You may be fortunate enough to be at a point in your life where you’re young and healthy, but that doesn’t mean it’s not worth it to look ahead. For example, taking out a life insurance policy earlier in life can let you lock in better rates for the long term. Additionally, if you own property together with another adult, a life insurance policy can help them keep up rent or mortgage payments in the event of your passing.

A stay-at-home spouse

Even if, as a stay-at-home spouse, you don’t bring in any income, the support you provide your family is still immensely valuable. This includes financial value — if you were to pass away, and your spouse then had to take care of all the work you do, would they be able to do it alone? Would they be able to maintain their career at the same time? Or would they have to pay others to provide all the services you took care of?

Many families only take out a life insurance policy for the spouse who works outside the home. Don’t make this mistake — taking out a policy for yourself as the stay-at-home spouse can help ensure your family doesn’t lack essential support should something happen to you.

Someone with a pre-existing condition

A pre-existing condition refers to any health concern or condition you were dealing with before applying for insurance coverage. These may include conditions such as asthma, heart disease, diabetes, depression, cancer, obesity, autism, and epilepsy, among others.

The list of pre-existing conditions varies from policy to policy, so it’s worth doing your research. Regardless of your condition, there are policy options for you.

What does it cover?

As we mentioned above, life insurance provides income replacement for the insured’s beneficiaries during their working years. This is significantly helpful on its own, but life insurance policies can also cover funeral and burial expenses, outstanding debts, day-to-day expenses, and future large life expenses such as college tuition.

What determines the cost of life insurance premiums?

When taking out a car insurance policy, the company will look at factors such as your driving record and the type of car you drive to determine how much you’ll pay in monthly premiums. Life insurance companies consider many different factors to determine what you’ll pay as well. Some of these include:

Age

We’ve listed this factor first for a reason. Out of all other factors considered, your age has the greatest impact on your life insurance premium. The likelihood that your insurer will have to pay out on your policy increases as you age — therefore, so do your premiums.

Gender

In the United States, women tend to live about five years longer than men. The average life expectancy for U.S. women is 81.1, versus 76.1 for U.S. men. Since women live longer, insurers are less likely to have to pay out, and so women pay less.

Hobbies and habits

Anything that has the potential to lower your life expectancy will likely raise your monthly premium. For example, do you smoke? If so, you’ll pay a higher rate. Are your hobbies more along the lines of skydiving or bungee jumping rather than reading or knitting? High-risk activities come with higher premiums, too.

Health

Many life insurance companies require you to undergo a medical exam and grant access to your medical records before you can take out a policy. A history of illnesses, as well as higher weight, blood pressure, and cholesterol levels, can all lead to higher premiums.

Family medical history

In much the same vein as your personal health, a history of certain illnesses within your family can also raise your rates.

Driving record

We mentioned your driving record above as a factor in car insurance rates, but it can affect your life insurance premiums as well. A more reckless driver can expect a higher rate than a more cautious commuter.

Amount of coverage

In general, taking out a larger policy with more guaranteed protection for your loved ones will cost you a bit more.

Tips to think about your life insurance needs

When deciding whether you need life insurance, and how much you need if you do, there are a few different things to think about.

  • Don’t skimp out on protection. It’s better to have a bit more coverage than you strictly need than for your beneficiaries to have to get by with less.
  • Consider it essential. Think about life insurance as part of your overall financial plan, just as important (if not more so) as car or renter’s insurance.
  • Talk it through with family. If your goal in taking out a policy is to protect your family, they might like to have some input.
  • Vary your coverage. Rather than buying one large policy, you have the option to purchase several smaller policies to vary your coverage in response to changing needs.
  • Payout amount. Your policy payout should be enough to pay off any of your outstanding debts, plus interest, and to replace your income, with inflation factored in.
  • Consider comparisons. You wouldn’t buy the first car you look at on the lot — don’t buy the first policy you’re offered, either. Compare quotes, and make sure the company you choose is financially stable and well-reviewed.

How do I determine how much life insurance I need?

All the information above can help you figure out what kind of life insurance coverage to choose. To determine the actual amount of coverage you need for your unique situation, consider:

Online calculators

Online insurance calculators, such as this one from NerdWallet, are a great place to start in your purchasing process. They’ll ask you questions about your lifestyle and needs that can help you get a better idea of how much coverage you should buy.

Manual calculations

If you prefer to work out your insurance needs on your own, you have options there as well. You can:

  • Multiply your income by either 10 or 20, depending on which experts you ask. However, note that this does not take into account contributions from stay-at-home parents.
  • Buy X (10 or 20) times your income, plus $100,000 for each child for college expenses.
  • Use the DIME method. DIME stands for Debt, Income, Mortgage, and Education.
    • Debt (and final expenses): Total your debts, not including your mortgage, plus an estimate of your funeral expenses.
    • Income: Determine how many years’ worth of support your family will need, and multiply your income by that number.
    • Mortgage: Determine the amount you need to pay off your mortgage.
    • Education: Estimate the cost of sending your kids to school and college.

We know life insurance seems confusing. It’s certainly a daunting topic with plenty of moving parts. We hope this article makes things seem a bit more manageable, and we’re always here to help — Elephant partners with LifeDirect to make getting a life insurance plan easy and accessible. Contact us or get a quote today.

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