How much life insurance do I need? You need a life insurance coverage that is 10-15 times the annual expenditure of your family, or 8-12 times your annual income, to cover the financial needs of your dependents. Another way to calculate the coverage is by multiplying the remaining years in your retirement with the annual income.
Life insurance: how it works?
Life insurance is a contract between a policyholder and an assurer by which the assurer or insurance company is obliged to pay a nominated beneficiary a face value in exchange for the lump-sum, monthly or annual premiums paid by the policy owner when the policyholder dies.
I mentioned in the contract, critical illness of the policyholder can also trigger the payment. The death benefit can also include funeral and burial expenses depending upon the insurance policy.
Parties to make a contract
Life policies are legal agreements and the rules and regulations of these agreements are designed in such a way to minimize fraud or civil commotion.
Two parties take part in the contract, one is the insurer, a representative of the insurance company and the other is a policyholder, who wants to buy a life insurance policy.
Contract is based on such terms that clarify certain situations for the nullification of policy. Also, the type of premium payment (monthly, annual, or lump-sum) and the beneficiary is also nominated according to the contractual requirements.
A number of insurance companies don’t cover suicidal death, so as mentioned in the contract. Moreover, the payment of death benefit would be immediate or delayed, its also decided by the policyholder at the time of contract.
Face value and death benefit
Face value or face amount is the smaller portion of the money that is paid by the insurance company at the death of the insured or when the policy reaches its maturity. Insurance policy gets matures when the policyholder dies or reaches a certain age limit.
Death benefit is a lump sum amount or maybe sometimes even lesser than the face value that is later paid to the beneficiary. for greater or lesser than the face amount.
Some other factors that are equally important and seriously considered by an insurance company while making a contract are:
Medical history of the policyholder
Current health condition
Family history of the policyholder
Body mass index
Smoking or drinking habits
Hobbies and driving record of policyholder
All these factors have a direct effect on the life insurance terms and the rates of premiums. Applicants who are young, healthy, and have a good driving record are an easy choice for insurance companies as compared to the aged and sick applicants.
Life insurance is a hedge against the expected financial crisis in case of the death of the financial supporter of a family. It begins with a contract and contains all rules and regulations to avoid any exploitation.
Types of life insurance
There are five main types of life insurance policies that vary from each other by means of premium rates, duration of enforcement, and investment strategies. These types have been discussed below:
1. Whole life insurance
Whole life insurance policy comes under the umbrella of permanent life insurance. It offers life insurance coverage and has an associated investment account known as a cash value account.
Cash value account expands with the passage of time because of the interest accumulation and policyholder can borrow against it.
2. Universal life insurance
Universal life insurance is also a type of permanent insurance and shares the same qualities such as a cash value account as whole life insurance.
Its premiums are relatively lower and flexible than the whole life insurance. However, some universal life insurance policies require a single lump-sum premium in advance or fixed premiums.
The attractive point of universal life insurance is that the policyholder can adjust the premiums and death benefit according to his wish or budget.
3. Variable life insurance
Variable life insurance is another type of permanent life insurance. Like other life insurance, it offers a death benefit that is comparatively much larger than the amount a policyholder pays a premium.
In variable life insurance, the premiums that are paid by policyholder go into the account in a lesser amount than paid by an insured because of the management or operational charges
Moreover, the insured can submit a portion of his premiums into a fixed account, which in contrast to the mutual fund, pays a specific amount as interest.
4. Variable universal life insurance
Before investing in a life insurance policy, one should know that what is variable universal life insurance and how does it work?
Variable universal life insurance is a kind of permanent insurance policy in which the cash value account grows via investment in several funds such as mutual funds.
It differs from variable life insurance in a way that allows the policyholder to invest some or even all of his cash value in an account that comprises of investment funds.
In this way, the inflation of the account is directly in the hands of the policyholder instead of the insurance company.
5. Term life insurance
Term life insurance pays the pre-determined death benefit to the beneficiary of the policyholder if the policyholder dies within the specified term. If a policyholder outlives the term, there will be no death benefit available and the money is kept by the insurance company.
Term life insurance policies have no extra benefit other than the stated death benefit and also it offers no saving account as present in the permanent life insurance policies.
These insurance policies are relatively cheaper and offer very low premiums as compared to whole life or universal life policies. The term can range from one year to 30 years.
Pros and cons of permanent insurance
|Cash value grows tax-free||Tax is applicable to the interest money when withdrawn|
|No expiry, policies can last for even 110 years||Policies are not convertible|
|Policyholder can borrow against the accumulated cash value||Money gets blocked in cash value and policyholder can’t invest in anywhere else|
|Lethal diseases can accelerate the face value even before the death||Premium rates increase with the age and health condition of policyholder|
|Cash value can grow much faster depending upon the performance of the stock market||Cash value may decline if the stock market|
Pros and cons of term life insurance
Term life insurance is relatively more popular than permanent insurance, yet it has some associated cons.
|Low premium rates||Temporary insurance coverage|
|Flexible policies||If the policyholder outlives, there is no death benefit|
|Convertible nature||Death benefit decreases in some policies with the age of policy|
|Available in times of need||No saving component|
|Larger payout is given to beneficiaries||Needs renewal after each term|
Best life insurance companies
Insurance companies are present everywhere offering all types of life insurance policies. They differ from each other in the terms of rates and types of policies that they offer. Here are some important life insurance companies acting in various countries:
Top life insurance companies in the USA
Best life insurance companies of U.S.A along with their associated factors have been listed below:
|Company||Rating||Rate in per month|
|Northwestern mutual||4.6 out of 5|
|Haven life||4.3 out of 5||10.79 $|
|State farm||4.2 out of 5||15.3 $|
|Banner life||4.1 out of 5||8.69 $|
|Principal||4 out of 5||8.78 $|
|Pacific life||4 out of 5|
|Bestow||4 out of 5||8.02 $|
|Guardian life||3.9 out of 5||10.02 $|
|Nationwide||3.9 out of 5||13.12 $|
|Primerica||3.9 out of 5|
|Mass mutual||3.9 out of 5||10.22 $|
|New York life||3.8 out of 5||10.75 $|
|Allstate||3.8 out of 5||15.3 $|
|John Hancock||3.7 out of 5||11.30 $|
|Protective||3.7 out of 5||8.93 $|
|Brighthouse financial||3.7 out of 5||16.18 $|
|Mutual of Omaha||3.6 out of 5||11.85 $|
|Prudential||3.6 out of 5||15.52 $|
|Policy genius||3.5 out of 5||17.82|
Top life insurance companies in Australia
Best companies providing life insurance in Australia are given below:
|Company||Ranking||Market share in %||Head office|
|TAL life limited||1st||24.2 %||Sydney, new south wales|
|AIA Australia limited||2nd||15.1 %||Melbourne|
|Zurich Australia limited||3rd||14.5 %||North Sydney|
|MLC limited||4th||11.6 %||North Sydney|
|AMP group||5th||10.5 %||Sydney|
|BT/Westpac group||6th||7.60 %||Sydney|
|Comminsure group||7th||6.6 %||Sydney|
|MetLife insurance limited||8th||5.00 %||Sydney|
|Other companies||9th||3.20 %|
|Clear view||10th||1.60 %||Sydney|
Best life insurance companies in London
Here is the tabulated list of best life insurance companies in London :
|Emerald life insurance||5 out of 5||Bermondsey, London|
|MNK re limited||5 out of 5||London, England|
|Drew berry financial||4.9||Brighton, England|
|Crossroads insurance services||4.2||London|
|Cheap life insurance||4.4||London|
|Pacific life||4.0||Newport beach|
|AIG||4.0||Fenchurch street, London|
|Zurich insurance||3.7||70 Mark Ln London|
How much coverage should I get?
Being crystal clear about how much life insurance coverage you actually need for your family is one of the main and decisive steps while buying a policy exactly according to your needs.
How much life insurance do I really need? it’s the question that needs full attention before buying a policy to choose the right amount for your loved ones in the absence of your financial needs.
DIME method is usually used to calculate the insurance coverage. DIME stands for debt, income, mortgage, and education.
D: Debt that a policyholder will leave for his family is included in the required coverage
I: Income of a policyholder is multiplied by the number of years that he wants to replace his annual income
M: Mortgage price that serves as a saving component, subtracted from total coverage needed
E: Education expenses that will be needed to pay by the children of policyholder
Although one can have another policy later on in addition to the current one yet it’s not pre-decided. It depends upon your financial conditions, health conditions, and age that either you are able to buy insurance in your later life.
Calculating the amount of life insurance coverage doesn’t need you to be a mathematician, rather it’s a quite simple calculation, consisting of a single equation.
That simple equation is stated as:
[Financial needs you need to be covered] – [volatile assets that can be utilized] = Needed life insurance coverage
Financial needs that you want to be covered may consist of the following:
Multiply the annual salary with times the number of years that you want to substitute your income. The resulting amount will be the substitution of your present income and future coverage.
Building a house
One can add the total amount needed to build a house for his family to stay in without the threat of losing it. However, if he has a house already, there is no need of adding it.
Other large debts: Would your family struggle with other large debts if you passed away unexpectedly? If so, add those in.
Children’s academic expenses:
If children are younger at the time of policy purchase and will be needing to pay their academic expenses after you die, you should add this money in the responsibilities side.
However, sometimes a policyholder has some assets in hand that can be used to cover some needs. For example:
Current life insurance: if the policyholder has some life insurance that will provide financial relief, then that money can be subtracted from the required coverage.
However, group life insurance or supplemental life insurance can’t be trusted as it ends when your job ends.
If you have some savings as a bank balance that can be used by your family when you are no longer alive, you can subtract that money from the obligations. The pension can also be considered a bank balance.
Funeral and burial expenses
A lot of people also consider the inclusion of funeral and burial expenses in their life insurance policy. But if the main policy doesn’t cover these expenses, one can buy separate burial insurance to cover these charges.
Dave Ramsey about life insurance coverage
David Ramsey is an American radio host, writer, and businessman. Financial experts like Dave suggest having insurance coverage as a death benefit that is 10-12 times the annual income of policyholders.
That much amount is needed for securing the future of his family when he is no longer alive to support them.
Dave however supports buying a term life insurance as it is easily affordable and flexible. Moreover, it pays the people of your choice a pre-determined amount when you die.
But there is a disadvantage that the term life insurance is only beneficial for your family if you die within the term. Luckily, most of the term insurance policies are cheaper than one can think.
Cost of policy premium depends upon the following factors:
Age of policy— some term insurance policies become expensive with their age as happens in some increasing term insurance policies. Death benefit increases along with the premium rates. However, it’s not the same for all policies. Most of the time, the death benefit is the only thing that increases with the premiums being constant.
Physical health— a healthy and young applicant is always an easy choice for insurance companies as compared to a sick and old applicant. Healthier you are, the lower rates you get.
Life insurance calculator
If a person is still confused about the calculation of the amount of death benefit, he can use a life insurance calculator to calculate the coverage.
Most of the insurance companies recommend that 6 to 10 times the annual income of a policyholder is quite a reasonable amount for the heirs.
Needed coverage can also be calculated by multiplying the number of years left in retirement by your annual salary. However, the average cost of life insurance is about $ 25 per month for 20-year term insurance, the most popular type of term life insurance.
- Before calculating the required amount of life insurance, the following questions are considered first:
People that you need to support
Mostly a policyholder has to support a life partner, children, parents, and sometimes siblings. More the people you have to support, the more the amount of coverage you will need.
Time duration for which dependents need the financial support
For example, younger children need support for a much longer time than grown-ups. The ages of the dependents must be considered while calculating the coverage. Consider the ages of everyone who depends on your earnings.
Amount of debt that you have to pay
If a policyholder has to pay the personal loan, mortgage loan, or car loan, he will be needing more coverage in addition to the expenses of the family.
Savingsthat a policyholder has
Savings such as property or bank balance serves as financial security and can be considered by the policyholder to subtract from responsibilities.
Reasonable coverage for life insurance can be calculated in three ways. DIME method, multiplying with times the number of years you want to replace with your annual income or by thumb rule.
How much life insurance do I need at 60?
As the needs of life and expenses of the family keep on decreasing with the increasing age, the mortgage has been paid, the house is bought and no bigger expenses are left when a person reaches the age of 60.
The best choice for a person at 60 who wants to buy an insurance policy is to go for 30-year term insurance instead of permanent life insurance. Because in later age children have been married or established and no more debts are left to pay.
A coverage that lies between $25,000 to $50,000 is more than enough for the insurance policy at the age of 60. It may be used for the burial and funeral of the policyholder or he may want to provide security to his spouse or grandchildren.
How much life insurance do I need as a single person?
If you are single, it does not mean that you don’t need a life insurance policy. you must have a life insurance policy with coverage to fulfill your end-of-life needs, such as burial and funeral, etc.
A funeral and burial policy of coverage $12,000 to $30,000 are generally more than enough to cover the end of life expenses of a person. In this way, one can make sure that he will not be trouble for his friends and family.
How much life insurance do I need at age 30?
Buying a life insurance policy at age 30 is the wisest decision made by a policyholder. 30 is the age when a person is quite young, healthy, and energetic with the lowest rate of medical anomalies.
Moreover, at this age, a person is a financial supporter of spouse and younger kids who will be highly benefitted by term life insurance policy if he dies accidentally. The best insurance policy that one should choose is 20-year term insurance.
Here are the rates for 20-year term insurance rates for various types of coverage.
|Coverages||$ 250,000||$ 500,000||$ 750,000|
|Age||Gender||per month||per month||per month|
Frequently asked questions
Life insurance and the amount of coverage that is needed by heirs of the policyholder is the topic of interest for people. Here are some answers to satisfy the queries of such people:
1. How much does life insurance cost per month on average?
According to the results of the S&P Global market, the average premium for the life insurance policy is $45 for a month. Premiums are usually lower for young policyholders as compared to the old and sick people as the premium rates are usually increased with the life of the insurance policy.
However, for a young policyholder, the average premium rate for a term life insurance is $15 and in the early forties, it can cost $23 per month.
2. Is life insurance a waste of money?
Basically, the life insurance policies are used to replace the income of a policyholder when he is no more. However, if the cash value is invested in a dead account or there is no nomination of a beneficiary can be a waste of money.
Especially in the case of term life insurance if the policyholder is outlived the policy, there will be no death benefit and obviously, all the money invested as premiums is wasted. So there is a need to convert or renew the policy when it reaches the expiry.
3. When should you get life insurance?
Normally, a person needs a life insurance policy if he has some dependents who need his financial support and can’t survive without it.
Moreover, if you are in debt and fear that your family won’t be able to pay that debt if you die, you should go for a life insurance policy.
4. How much life insurance do I need the rule of thumb?
According to the basic rule of thumb, a policyholder needs an insurance policy that offers a death benefit equal to the amount 7 to 10 times the annual income of the policyholder.
However, it’s not a final and decisive calculation and there is an error of margin. A policyholder should buy a policy with the coverage slightly more than his expected responsibilities to cover the extra and unexpected expenses.
Suppose, the annual income of an insured is $20,000 per year. A reasonable coverage for an insurance policy should be $200,000 that is 10 times the annual salary.
5. How much life insurance do I need at age 55?
55 is just a number. No matter which age you are, the cost of life insurance increases with the age of the policyholder and his physical and medical conditions. Insurance companies consider the family history, current health, expected life years, and habits of the policyholder while making the contract.
Life insurance policy by a person of age 55 should be chosen by a thorough comparison of various quotes and also according to his present financial condition and future needs that vary for each policyholder.
6. How much does a typical life insurance payout?
An average life insurance payout for term life insurance and whole life insurance policy is tabulated below:
|Life insurance policy||Term years||Average annual premium|
|$1,000,000||20-year term policy||$1,234|
|$1,000,000||30-year term policy||$2,347|
|Whole life insurance||Whole life||$17,750|
How much life insurance do I need? It’s a common question that is considered by every applicant of the insurance policy. Generally, a coverage that is 8-12 times or according to some insurance companies 6-8 times the annual salary of a policyholder is considered reasonable.
However, 10-15 times the annual expenses of family or the calculation by considering the responsibilities of a policyholder are some other ways to evaluate the coverage of life insurance.
DIME (debt, income, mortgage, education) method is usually known to calculate the life insurance coverage.