The Basics of Life Insurance: Part 2

How Much do I Need?

Determining the right amount of life insurance coverage can be a daunting task, as there are varying opinions on how much coverage is needed. Some professionals suggest 8x your annual income, while others recommend 12x, or even 20x. The maximum coverage life insurance companies usually offer is around 25x your annual income. However, the ideal amount of coverage differs among everyone, and the following items can be added together to help discover an individual’s estimated ideal coverage:

  • Obligations – this includes any outstanding debts such as mortgages, auto loans, etc.
  • Income – the simplest way to calculate this step is to take your annual income and multiply it by the number of years you would want that income to be paid to your beneficiaries (e.g., $100,000 annual income for 10 years equals $1,000,000 coverage).
  • Future Anticipated Cash Needs – Consider potential future expenditures such as college education, weddings, new vehicles, etc.

By performing this checklist and adding up the totals of each category, you can arrive at a reasonable estimate of your life insurance needs. Remember, individual circumstances vary, and it’s best to consult with a financial advisor to ensure you have adequate coverage to protect your loved ones.

Types of Life Insurance Coverage

Before deciding to invest in life insurance, it is important to distinguish the different types. There are various forms, but they can each be grouped into two primary categories of life insurance:

  1. Term Life Insurance
  2. Whole Life Insurance

Term life insurance is coverage for a period of time or number of years, such as 10, 20, or even 30 years. The coverage of term life insurance only applies during the “term” of the policy. During the term, the policyholder pays a set premium amount. In exchange, the insurer pays a death benefit to the designated beneficiaries if the insured passes away during the term of the policy.

The primary advantage of term life insurance is that the cost to obtain it is relatively inexpensive. Additionally, when coverage is no longer needed, you can let the policy lapse without any penalties or repercussions. On the other hand, there are also certain disadvantages associated with term life insurance. For example, if the insured were to pass away after coverage has expired, no death benefit would be paid out to the beneficiaries. Secondly, term life insurance does not build up cash value within the policy, unlike the whole life insurance policy options.

Whole life insurance, also known as permanent life insurance, provides coverage for the policyholder’s entire life instead of a set term. The premium payments are typically paid by the insured for their entire life. A portion of each payment goes towards building a tax-efficient cash value within the policy that can be used for various purposes.

However, it is important to note that the premiums for whole life insurance are typically significantly higher than those for term insurance for the same amount of coverage. This cost difference can make whole life insurance less accessible for those with limited budgets. As such, it’s essential to consider one’s financial situation and individual needs when deciding whether whole life insurance is the right choice.

Because each person has different circumstances and needs, there is no one policy or amount that is right for everyone. Consider consulting with your financial advisor or an insurance professional before making any decisions.



Luke Brooks, CFP®, ChFC®, RICP®, is an Advisor at The Welch Group, LLC, specializing in providing fee-only investment management and financial advice to families of various backgrounds. Luke is a graduate of Columbia International University, is passionate about helping others achieve their financial dreams, and is a Certified Financial Planner®.



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