How much life insurance do you need?

First of all, do you need a life insurance policy?

As a fee-only financial planner, my answer is “maybe”.

Does Tomassi Financial Planning sell life insurance policies?

No.

Can I help you determine the specific amount and type of life insurance that is right for you?

Yes, and I can also point you in the right direction so that you purchase your life insurance policy from a reputable agent (I receive no commissions, kickbacks, favors, or finders-fees from those referrals).

When thinking about life insurance, start with the end in mind.

Life insurance has one primary goal – someone receives a check from the life insurance company at your death.

Depending on the type of life insurance policy, secondary goals can include saving money for college, business “buy – sell” agreements, and estate taxes.

For the balance of this post, I’m focusing on the primary goal.

So ask yourself this question: who is financially dependent on you?

If your answer is, “no one”, then there’s a really good chance that you don’t need to buy a life insurance policy.

Why? Because life insurance is primarily about replacing the income of the insured individual. It’s about ensuring the financial health of any family members, employees, or friends who will suffer financial hardship if the insured person dies.

When figuring out the dollar amount of coverage, do the math.

There are essentially two methods for calculating the adequate amount of life insurance coverage.

The first is a “rule of thumb” based on your income. Using this method, multiply your income by 10 and that’s how much life insurance coverage to purchase.

The second method is more specific to the current and future financial needs of your loved ones.

To start, determine the amount of money they would spend on an annual basis in order to maintain their current lifestyle. Next, decide the number of years that you want to ensure that their living expenses are covered.

With those figures at hand, decide on an inflation rate and annual rate of investment growth. With those numbers, you can now calculate the lump sum needed today to provide for their future financial needs.

If you want to also pay off a mortgage and cover college education costs – add those costs into the lump sum.

If you are a parent of young children, keep in mind that you are likely covered by Social Security – which will provide a financial benefit to your minor children and surviving spouse who is caring for your minor children. The Social Security website is a good resource to learn about survivor benefits.

While the second method is more complex and time consuming than the “rule of thumb” method, it is also far more accurate to your needs and will ensure that you don’t purchase more than or less than the amount of life insurance coverage needed to provide for your loved ones. 

What type of policy do you need?

If you want a plain vanilla, low cost life insurance policy, go with term life. The simplest analogy is that of renting versus owning. With term, you are renting a death benefit for a pre-determined period of years. There is no-cash value and no investments. It’s strictly a death benefit policy.

If you’re young and healthy, you can buy a lot of coverage for very little premium. I recommend visiting Quotacy to get a sense of the premiums, duration, and coverage that works within your budget.

If you want a policy that offers an opportunity to grow a cash balance, then consider “permanent” life insurance. The three types of permanent life insurance are:

  • Whole Life
  • Universal Life
  • Variable Universal Life

If you live in the Loveland area – or anywhere along the Front Range – and are uncertain about your life insurance policies and the financial needs of your loved ones, consider making a complimentary appointment with me. I am a fee-only financial planner (CFP®)