Ahhh, life insurance.
One of those “fun” topics that’s such a mystery to most people that they have no idea if their current policy (if they have one) is enough.
A company-sponsored $100,000 policy might be okay for a single person with no dependants.
But—once you start adding in a spouse, children, mortgage payments, and the need to save for future education costs—$100,000 will dry up as soon as you snap your fingers.
Life insurance isn’t just about covering your final expenses… It’s about setting your family up for success without you, and making sure they’re taken care of when you’re gone.
How do I know what kind of life insurance to buy?
If we were all as rich as we wanted to be, life insurance wouldn’t even be necessary. We’d have enough of a nest egg in the bank and in various investments that if our family suddenly lost our income, all our other wealth could support them.
But since building wealth is a decades-long journey for most people, we need some sort of life insurance coverage.
And when you buy life insurance coverage, there are two types:
- Term life insurance
- Whole life insurance
Whole life insurance policies last for your whole life, as the name suggests. No matter how old you are when you pass away, your family receives the cash benefit of the plan you choose. Because these last your whole life, they tend to be more expensive than term life insurance policies.
A term life insurance policy, on the other hand, only lasts for a set “term,” or period of time. If you purchase a term life insurance plan for 30 years, for example, the plan will pay the benefit to your family if you pass away within those 30 years, but not after.
Since our goal as financial planners is to set you up for financial freedom, you’ll ideally be financially independent in your later years, and not need life insurance. For this reason, we suggest term life insurance until you’re on good financial footing.
Do I have enough life insurance?
After you decide which type of coverage to shop for, the next question becomes how much coverage to buy.
You could take the time to go through your budget, calculate expenses, guess at inflation, and come up with a sum you think your family would need… or you could go with the 10x rule of thumb and buy life insurance for 10x your annual income.
If you have other financial needs, like future college education for children, special medical needs for a family member, or you’re a stay-at-home partner who provides a lot of financial value to the home outside of an income, make sure you add to that 10x amount.
Get Covered with Enough Life Insurance
The Catch-22 about life insurance is this: the younger you are when you sign up for it, the cheaper it is! If you’re not yet financially independent, go ahead and sign up for a life insurance plan beyond your employer-sponsored minimum.
