Life Insurance : Do you really need it and how much?

We've all seen the ads or worse had a insurance salesman try to guilt us into buying a life insurance policy so we don't burden our family if we happen to pass away. But is life insurance really that important?

The short answer is maybe but it depends upon your situation. There's two reasons to buy insurance; first to pay off debts and the second is to give a pile of money to those you leave behind. Note: I am only considering term life insurance policies in this article, whole life policies will be discussed in a future post.

Single no kids

This situation is simple you only need enough assets to bury yourself and pay any private students loans off.  Private student loans sometimes go to your next of kin whereas federal loans and most other debt is written off by the lender when you die.  If you have a job that provides a fringe benefit of life insurance (tax free up to $50,000) that benefit should be sufficient.

Married and/or kids

This is where things get a little complicated. If your spouse has a well paying career then you can consider forgoing life insurance completely but it would probably be nice to leave a chunk of change to pay for things like a house and the kids college. If your spouse is a stay at home parent then leaving them enough to live off is probably a good idea.

How to figure out how much Insurance you need

First gather your debts, investments, and savings goals

If you are pretty young then you are probably looking at somewhere around a million dollars in debt and savings goals. Now this is offset by your survivors social security benefits. A caveat about SS survivors benefits is that your children and spouse only get them while the children are under 18. Your spouse will get other benefits when they turn 62-70. There is also a SS family limit of around 150% the maximum benefit so realistically you are looking at around $20-36K per year (check your actual benefit) for your family regardless the number of children.  I like to think of the SS survivor benefit as the college money for the kid(s). 

If your spouse works this means you only need to have life insurance to covers debts and child care (hopefully this is only $400-$600K). But in some parts of the country like California a mortgage on even a modest house can be in the millions.

If your spouse is a stay at home parent and you want them to stay that way you'll want to add life insurance to substitute your income.

As you pay off debts and accumulate savings your need for life insurance decreases. Usually your need for life insurance disappears around the time you are ready for retirement. This naturally makes buying a term (20-40 years) life insurance plan an attractive option.