How Much Term Life Insurance Does a Person Need?

By Chris Shore

  • Overview

    Everyyone needs life insurance. But do you need just enough to cover the burial, or should you get more? If so, how much more? Does a stay-at-home mom need insurance, too? What about the kids? Everyone needs life insurance. Determining how much depends on several factors.
  • Types

    Life insurance falls into two categories: whole and term. You may hear other terms such as group, universal or variable, but they are all modifications of the two originals. Term life insurance allows you to buy an amount of insurance for a number of years, or term. If the insured dies during the term, benefits are paid. Premiums are usually low, but at the end of the term, the insurance is over, and a new policy must be bought. Whole life covers the whole life of the insurer, not just a term. The policy also creates a cash account that usually earns interest over time. While that cash is yours to keep if you cancel the policy, premiums are much higher for comparable term insurance.
  • The Facts

    Life insurance insures just that--life. It ensures that the ones left behind are able to continue their current lifestyle. What that means is different from person to person. A single woman has no one to depend on her but wouldn't want to cause a family member to incur a cost. A married father of four, who is the sole breadwinner, has more to worry about than just the cost of a funeral.

  • Considerations

    The most important question to determine the amount of insurance is: What financial impact would I have on other people's lives if I passed away? This is not easy to do, as some of us want to assign a dollar amount to the emotional effects of our death. Remember, this is financial impact. It will hurt your parents greatly if you die, but the financial impact would be small. They would have to pay for your arrangements, but as they do not rely on you for support and cannot inherit your debts, they do not need a large sum of money. If however, your current salary goes to provide food, clothing and shelter to others, they will need a large sum to continue providing for themselves unless there is a large sum saved somewhere to replace that income.
  • Time Frame

    Another consideration is, how long the insurance is needed for. If you are young and plan on getting married eventually, short-term life insurance is perfect. You can get a small amount to cover any expenses you may leave behind until your situation changes and you need more insurance. You will have paid low premiums and can walk away with ease. The amount saved over a short period on whole life does not begin to equal the increased premiums. If, however, you find that your income will be needed for your dependents, long-term or whole life may be the solution. Whole will work as an insurance premium and an investment tool. Term will offer you low premiums, allowing you to put the difference into a better investment vehicle. If you're buying to cover burial expenses only, the whole life should suffice.
  • Expert Insight

    Dave Ramsey, a financial counselor who has been host of "The Dave Ramsey Show," a national program, says you need 10 times your income when people are dependent on you. If they invest the payout sum in a mutual fund that ears 10 percent interest, they have effectively replaced your income each year. If Mom stays at home, try for about 10 times the annual salary for a nanny. Otherwise, save and invest wisely and you can eliminate most of your insurance needs.
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