How much life insurance do you need?

How much life insurance do you need?

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If you’re the breadwinner in your family, the fear of dying young can push all sorts of emotional buttons.

Scary as an early demise sounds, it’s important to analyze the odds. If you are in decent health, your death at a young age qualifies as a low-probability event.

If you have children, you probably need some life insurance. You want to leave behind money to pay for their care and college tuition should you die.

But you should weigh the security provided by life insurance against the chances that your kids will ever need it. It’s smart to pay a little for life insurance. But resist the temptation to pay too much to protect your family against something that’s unlikely to happen.

Here’s another way to think about it: You shouldn’t need life insurance after you turn 65. Yet you’re unlikely to die before age 65.

Insurers have studied life expectancies more closely than anyone. Their actuaries know that healthy non-smokers are likely to live past 80. That explains why adults in their 30s and 40s can buy term life insurance at affordable rates – usually a few hundred dollars a year.

Three rules for choosing a policy

When shopping for life insurance, follow these strategies:

  • Focus on term life insurance, and steer clear of whole life policies.
  • Buy a policy with a benefit ranging from five times to 20 times your annual income.
  • Aim for a term of 10 to 30 years, depending on your age and the ages of your children.



The details are straightforward: A term life insurance policy with a face amount of $500,000 pays your heirs $500,000 should you die.

When calculating how much life insurance you need, consider the value of any employer benefits you receive. Many employers offer term life insurance as part of their benefits packages. Also keep in mind that Social Security provides modest benefits to children of parents who die.

Avoid whole life policies

The insurance industry aggressively markets costly whole life policies This type of coverage doesn’t expire so long as you keep paying the premiums.

With whole life insurance, part of the pitch is the policy’s savings feature. Some of the money that you pay in premiums is invested and grows over time. You can borrow against the cash value in a whole life policy while you're alive.

Don’t be drawn in by the sales pitch. You’re wiser to separate life insurance from your savings and investment goals. Stick with term life insurance, and funnel your investments to low-fee exchange-traded funds, rather than higher-cost whole-life policies.

 


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