What Is Life Insurance?
Life insurance offers you a contractual arrangement with an insurance company whereby they guarantee to pay your designated beneficiary a death benefit upon your death so long as you pay the regular premiums due on your policy. Paying your scheduled premiums keeps your policy “in force” or active, so that if you die, your beneficiary will receive the specified death benefit according to terms of the life insurance policy. Buying a life insurance policy can help provide greater financial security for your family in case something happens to you. Plus, having life insurance can help give you and your loved ones greater peace of mind knowing that your family will have some financial protection after you are gone. Review our Life Insurance 101 to learn more about the basics of life insurance.
Who Needs Life Insurance?
Life insurance can be an important financial consideration no matter where you are in life — whether you are:
- A homeowner
- A veteran transitioning back to civilian life
- A business owner
- A senior over 50
- A newlywed couple
- An expectant mother
- A new parent
- A single parent
- Concerned about your aging parents
- Thinking about changing careers
Major life milestones — like getting married, becoming a parent, buying your first home and retiring — can be good times to evaluate your need for life insurance. When family members are dependent on your income, life insurance can offer you coverage to help them pay for day-to-day living expenses in the event of your death. Your beneficiaries can use the policy’s death benefit to help pay for things like final expenses (e.g., funeral costs and outstanding medical bills), monthly mortgage payments and college tuition costs. In addition, you can use life insurance to help transfer wealth to the next generation or make charitable contributions to your favorite organization. Now may be an opportune time to address this financial question: Do you need life insurance?
What Does Life Insurance Cover?
With life insurance, the cash payout that your beneficiary receives when you die can be used for a broad range of purposes. Depending on their specific financial needs, your loved ones may decide to use this death benefit to:
- Replace lost income for your family.
- Pay for final expenses, including funeral and burial costs.
- Cover outstanding medical bills.
- Make monthly mortgage payments on your home.
- Fund continuing education or college tuition for your children.
- Pay credit card bills.
- Buy groceries, gas and other everyday living expenses.
Having life insurance can help provide economic security for your family during what can be both a very difficult emotional time and a financially challenging one.
What Are the Different Types of Life Insurance?
Life insurance basically comes in three different types: term, whole and universal, with each one having particular benefits and features. Here is a quick summary:
Term Life Insurance
- Temporary coverage for a limited period
- Death benefit with no cash value
- Level premiums for the number of years selected (usually 10, 15, 20 or 30)
- End of insurance coverage when term is over
Whole Life Insurance
- Permanent (lifetime) coverage1
- Potential for policy cash value accumulation
- Fixed premiums that do not fluctuate over time
- Ability to borrow against cash value2
Universal Life Insurance
- Permanent (lifetime) coverage1
- Potential for policy cash value accumulation
- Flexibility to change premium payments3 and death benefit amount4 (after policy is in force)
Continue your exploration of the different types of life insurance to help determine which option may best meet your financial needs right now.
How Much Life Insurance Do You Need?
Figuring out how much life insurance is the right amount for you depends on a number of factors. As you consider your coverage, you may want to think about:
- How many dependents you have (children, aging parents or other dependent relatives)
- Total amount of your personal debt (including mortgages, car loans and credit card debt)
- How much money your family would need for support after you’re gone
- Duration of years of financial support your loved ones would require
- Where you are in life (e.g., just married, having your third child or becoming an empty nester)
- Future financial needs and goals (e.g., funding your children’s college tuition or leaving a financial legacy to your favorite charity)
A good place to start may be to multiply your current yearly salary by the number of years your family would need to replace your lost income if you were no longer there to provide for them. Do your best estimating to help account for additional annual expenses like health care, childcare, ongoing education for your kids, homeowners insurance, property taxes, etc. Coverage also will depend on your station in life. For instance, a married couple in their early 30s with three children under the age of 10 may require significantly more life insurance than a couple in their late 50s with no children. Here is some additional information to help you determine how much life insurance you may need.
Using This Life Insurance Calculator
Our Life Insurance Calculator provides you with an estimated coverage amount of life insurance to help replace your income and provide financial security for your family in the event of your death. Choose to answer either several quick questions or a longer series of financial questions for a more comprehensive analysis of your current life insurance needs.
About Your Inputs
Begin by answering the following three questions:
- What is your annual income? – Enter a total dollar amount for your salary, wages and/or tips (gross yearly income before taxes).
- How many years is your family relying on your annual income? – In the event of your death, how long would your spouse, children and parents (and possibly others) need funds to replace your income to cover ongoing expenses such as mortgage payments, tuition, health care bills and daily living costs (e.g., gas, groceries, etc.)? Select a period of 10, 15, 20, 25 or 30 years.
- How much do you have in existing life insurance coverage? – Include here any employer and personal life insurance that you currently have. Enter the total dollar amount of coverage from these policies.
You may want to try the advanced version of the calculator by answering these additional four questions:
- Assets -About how much do you have in savings and investments? – These assets may include checking/savings accounts, mutual funds, stocks, bonds, individual retirement accounts (IRAs), 401(k) accounts, etc. Enter a total dollar amount.
- Debt -About how much do you currently owe? – What is your current total amount of debt? Include here any financial liabilities such as mortgages, home equity loans, credit card debt, car loans and any additional kinds of debt your family would need to pay off after you’re gone.
- Final Expenses -How much would your family need to pay for your funeral? – It may be surprising to know that the average traditional funeral in the U.S. costs between $7,000 and $15,000, including funeral home services, burial in a cemetery and installation of a headstone. Having a gathering of family and friends at a reception with food and drink would incur additional expenses. According to the National Funeral Directors Association (NFDA), the national median cost of a funeral with viewing and burial was $7,640 in 2019. If a vault is included, the median cost was $9,135. There are additional expenses for a headstone, flowers, obituary and gathering of friends and family at a reception. Enter a total dollar amount for what you expect final expenses would be to cover the costs of your funeral.
- Children -How much will you need to cover education and daycare expense for all your children? – Include a total dollar amount to pay for childcare expenses, primary school (pre-kindergarten through grade 5), secondary school (grades 6-12) and higher education (college) for all your children. According to the College Board’s Trends in College Pricing 2019, the average estimated full-time undergraduate costs for 2019 are $36,840 (public two-year/in-district/commuter), $106,360 (public four-year/in-state/on-campus), $171,880 (public four-year/out-of-state/on-campus) and $215,920 (private nonprofit/four-year/on-campus).
About Your Results
Based on your inputs, our Life Insurance Calculator estimates your coverage amount to give you a quick answer to “How much life insurance do you need?” You may want to request a quote for a more detailed follow-up with one of our Financial Representatives. A thorough life insurance needs analysis can assess both immediate and long-term funding needs for your family in the event of your death. What immediate final expenses (e.g., funeral costs, medical bills, etc.) do you anticipate? How much money will your family need to sustain their standard of living and cover long-term expenses (e.g., monthly mortgage, child care, college education, etc.)? A life insurance policy death benefit provides a replacement income to help cover your family’s financial needs in your absence.
Now that you have an initial coverage amount, you’ve taken the first step toward building greater financial security for you and your family. However, several other important factors – your stage in life, the size of your family and your plans for wealth transfer – are important to think about as you decide what kind of life insurance you want. Depending on what’s happening in your life right now, you may want more temporary coverage for a shorter period of time or permanent coverage for your entire lifetime. Premiums that remain fixed over time, guaranteed lifetime coverage, convertibility and the potential to build cash value or earn dividends are some of the different kinds of life insurance benefits to consider.