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How Much Life Insurance Do You Need?

By the Bestow Team·August 10, 2021·6 Minute Read

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Ah, yes. The $50,000 question. Or is it the million-dollar question? Suppose it depends on your policy (that’s a little insurance humor for you).

If you’re considering purchasing a life insurance policy, chances are you’re looking for a way to provide support for your loved ones should you pass away. When determining the amount of life insurance you need, you’ll want to think not only about your financial circumstances but also those of the beneficiaries you intend to name. 

What Can Life Insurance Pay For?

The short, simple answer is anything. When beneficiaries receive a death benefit, it’s up to them how to spend it. There are no restrictions around a beneficiary’s usage of a life insurance payout.

When you set up life insurance coverage, you might want to sit down with the people you plan on naming as beneficiaries and discuss your intentions, especially if you are the financial planner of the family. 

Though there are no rules, here are some examples of ways people use life insurance payouts: 

  • Mortgage: When calculating the ideal amount of life insurance coverage, some people will include the amount of their mortgage in the equation. Death benefits can be used to pay off a house or property.
  • Debt: Welcome to adulthood; there are no cookies here but we do have debt. Whether it is student loans, a half-paid-off car, or credit card debt, beneficiaries can use the tax-free life insurance payout they receive from your policy to pay off any debt you leave behind or to pay down debts of their own.
  • College education: If there are kids in the picture, life insurance payouts can be used to cover tuition and other educational expenses.
  • Income replacement: The loss of a financial contributor, whether considered the head of household or not, can be devastating. Life insurance payouts can be used to help your family keep up with the cost of living should you pass away unexpectedly.
  • Childcare: Whether you are a stay-at-home parent or work full-time, consider the cost of childcare for your family should you pass away. 
  • Final and future expenses: Death isn’t fun to think about, but being prepared for the unthinkable can help offer some peace of mind. Your beneficiaries might use their death benefit to cover your final medical bills, pay for your funeral (around an $8,000 average expense), or cover the cost of a move should they decide to relocate. 
  • Gift: Maybe you’re covered in the debt and expense department (#blessed). You can still use life insurance as an added comfort for your loved ones, dependents or not. If you’re a business owner, you might name a business partner as your beneficiary to cover the cost of carrying on the company once you’re gone. Some people choose to leave a legacy by naming a non-profit organization as their beneficiary.

Diagnosing Your Coverage Needs

Wouldn’t it be nice if you could just Google “how much life insurance should I have?” and the exact amount would appear on your screen? Maybe in the future, when cars fly and dishwashers have a put-away cycle, but for now, there is no clear consensus amongst financial advisors. But one rule of thumb you can use to help diagnose your potential needs is that coverage should be six to twenty times your annual income (helpful wide gap there we know).

When calculating the amount of life insurance coverage you need, you might consider the following.

Your Family’s Monthly Expenses

Monthly expenses vary from family to family. Maybe yours lives on a sustainable farm with solar panels. Perhaps you just bought your first house and have three kids with extracurricular activities. 

Either way, it’s a smart idea to use your personal circumstances to figure out how much life insurance coverage you need. More so, imagine how your family would cover expenses if you were gone. Are you the primary caretaker, the main breadwinner, or a combination of both?

Here is a list (not exhaustive, but pretty close) of things to consider:

  • Mortgage or rent
  • Car payments
  • Childcare ($8,355/yr average per child, and more in many places)
  • Housekeeping (it’s tough to do it all)
  • Utilities
  • Education (school supplies, college tuition,etc.)
  • Food 
  • Healthcare and insurance (your partner’s life insurance, medical insurance, homeowner’s insurance, car insurance)
  • Entertainment (might seem silly to think of but happiness is something to consider in these situations)

Add Up The Cost Of Your Financial Obligations

After you’ve made your list, ask yourself: Did we miss anything?

Whether it’s debt, a monthly bill you rarely think about, or the cost of your parent’s apartment in an assisted living community, jot it down with an estimated dollar amount.

Total Everything Up

Add your monthly expenses to your debt and then factor in any additional financial components that made it onto your list. Write that number down.

Next, determine how many years of life you want to help cover with this insurance policy. One way to do that is to subtract your current age from your planned retirement age. Now take that number and multiply it by your annual salary (it’s a bit of math, but it’s worth it!). 

How do you feel about that figure? Does it seem like the right amount of coverage? Would it cover the amount you wrote down earlier? Are there any factors that were left off that list that you would like to consider? 

We would love to give you clear direction here, but alas, we can only offer guiding questions. Figuring out how much life insurance you need is a personal quest. Feeling overwhelmed or unsure about selecting a coverage amount? It might be a good idea to consult with your friendly neighborhood financial planner. 

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What Are The Different Types of Life Insurance?

If you were today-years-old when you found out there is more than one type of life insurance, you are not alone. While there are many, many varieties, there are two main types of life insurance: term life insurance and permanent life insurance. The latter has a few subtypes, including whole life insurance and universal life insurance. 

Policy Type Term Life Insurance Whole Life Insurance Universal Life Insurance
Policy Length Coverage for a specific amount of time Coverage for your whole life (hence the name) Coverage for your whole life (hence the name)
Features Tax-free death benefit with no cash value Tax-free death benefit and cash value that accumulates tax-deferred Tax-free death benefit and cash value that accumulates tax-deferred

Which Type Of Policy Is Best For You?

Though they can guess your age and zodiac sign, the online quiz makers have yet to crack the life insurance policy code. And that’s just as well, because picking out a policy is a big (and deeply personal) decision. Ultimately, you’ll want to factor your age and current financial situation into the decision-making process.

Term life insurance typically offers smaller premiums than permanent life insurance, but it does not offer the cash value option that may be of interest to some. While whole life and universal insurance provide coverage for the extent of your life, term life insurance covers your life for a predetermined length of time, usually anywhere from five to 30 years. 

A Few More FAQs

Who Needs Life Insurance?

It’s certainly not anyone’s favorite pastime, but if you take a moment to picture what life would look like should you pass away, that vision will give you an idea of whether or not you need life insurance. If you have children, a partner, or people who rely on you financially, you might need life insurance. Likewise if you carry a mortgage, have debt, or own a business.

If you’re financially well off and have far more assets than debt or expenses, or you are just starting adulthood, you may not need life insurance. However (and this a pro-tip), keep in mind that the younger and healthier you are when you initially purchase life insurance, the more affordable your premiums will generally be for the life of the policy.

What Determines Life Insurance Rates?

When you apply for a life insurance policy, the insurer will use a few factors to calculate your insurance rates. They will likely consider your age, health, lifestyle, and smoking habits. Many life insurance companies require a medical exam and blood sample to purchase coverage while others skip that process and instead use technology to scan your medical history to determine eligibility and rates.

Finding The Best Life Insurance For You

If you want to further explore life insurance coverage costs, you can get a free quote in seconds here. You’ll just enter your gender, birthday, height, weight, and zip code. From there you can explore different term periods and coverage amounts t to get an idea of what your monthly cost might be with a policy underwritten by Bestow. 

Bestow offers term life insurance coverage of up to $1.5 million and applying for a term policy is nearly as simple as our quote process. There are no medical exams or no blood samples required – with Bestow, you could have life insurance coverage in minutes, if approved. 

Bestow does not give tax or legal advice. The information provided is not intended to offer any tax, legal or financial advice. It is always a good idea to consult your tax, legal and financial advisors regarding your specific situation. Our application asks about your lifestyle and health to determine eligibility in order to avoid requiring a medical exam.