Instead of asking how much life insurance should I get, let’s look at it from another perspective. How much life insurance can I get? How big of a life insurance policy will an insurance company give me?
Based on our experience with insurance company underwriting guidelines the numbers will actually surprise you.
You can actually get a life insurance policy for 30 times your annual income. Meaning: if you are making $100,000 a year, you are able to take out a life policy with a payout of $3,000,000.
How Insurance Companies View Life Insurance
From a life insurance company perspective, you need life insurance to replace your income until you are 65 years old. Once you are 65, you will be getting social security and pension payments.
A typical 30 year old, will be offered a 30 year term life insurance policy in the amount that is up to 30 times their annual income.
A typical 45 year old, will be offered a 20 year term life insurance policy, in an amount that is only up to 20 times their annual household income.
In both cases, the life insurance policy it to give them coverage until they are 60 – 65 years old.
Life Insurance as an Inheritance?
“I got a life insurance policy, so that IF I die, my kids will have a $1,000,000.”
or
“I got a life insurance policy. My kids will have $1,000,000 after I die.”
Which statement resonates with you? Are you buying life insurance as an income replacement protection for your spouse and kids? Or, are you buying life insurance to leave your kids an inheritance?
The way you answer the question, will make a difference if you want a whole life policy, or a term life policy.
How Much Life Insurance Should I Have?
Going back to the original question. How much life insurance can I get?
A young couple, making $100,000 a year, aged 30 & 32 have 2 kids. One child is 5 the other child is 10.
An insurance company will quote an insurance policy of $3,000,000 for 30 years.
Great, but why are they buying insurance? To replace Dad’s income in the event of an untimely death?
In 28 years, Mom will be 58, one child will be 33 and the other child will be 38.
Will mom be working? Will the children still be in college and dependent on Dad?
Planning for 50 Years
When thinking about life insurance, it is important to view it no different that writing a will. A will & trust is written for today’s reality, and takes into account, hypothetical / potential events in the next 5 – 50 years. Meanwhile, a will needs to be reviewed at least every 5 years to address changes in the family.
So too, a life insurance policy needs to be reviewed and revisited every 5 years.
Sometimes a new life insurance policy will be the best option. Other times, in addition to your current policy, it will make sense to buy another life policy. And occasionally, you will cancel the policy all together because it is no longer needed.
Similar to car insurance…
You buy a new car, and pay for Full Coverage. After 10 years owning the car, you cancel the Full Coverage because the car is no longer worth the price of insurance.
Same with life insurance. Today, you are young and have young kids. You need to plan for the next 20 or 30 years. In 10 or 15 years the reality may change, and the good decision when you first bought your life insurance policy is no longer relevant.
Bottom Line
Life changes and therefore your Life Insurance needs change also. How much life insurance can I get today is a number that will change every year until you are 60 years old. And when you are 60 years old, you probably will not be able to find an affordable life insurance policy.
So take it slow, plan for the next 30 years, and revisit that plan and adjust that plan every 5 years.