Life Insurance, How Much is Enough?

by Willie Ware

Steps to Help You Pick The Right Coverage

Step 1
Work out what you can afford
Simple term life insurance doesn’t have to be expensive. a 30-year policy for $100,000 might cost about $25 a month for a non-smoker. “You could spend more on coffee in a week than that. Where it does get expensive is when you’re older and looking for larger amounts or add-ons such as critical illness or Long Term Care. Regardless of how much coverage a rule of thumb says you need, the most important factor is how much you can afford.
If the sums show you need cover worth, say, $500,000 but would struggle to meet the monthly payments, use caution. There’s no point taking out a level of life insurance that you will struggle to pay each month. Life insurance should give you peace of mind, not be a source of worry. Don’t make your family live like a paupers now so that they can live like kings when you’re gone! Get the amount that's affordable and it all works out in the long run. It’s useful to consider this at the start of the process rather than at the end, when fear might make you take out cover you can’t actually afford.

Step 2
Consider the term you will need
Not everyone needs life insurance. If you have no dependents, it’s unlikely to be necessary unless the bank requires you to have mortgage protection on a property you purchase. But if you do have children, you will likely want them to have cover until they are independent.
This may traditionally have been until they reach 18, or the age at which they finished college, many people now look to have cover in place until the children are in their mid-20s, as younger people take longer to get established in the workforce.
So, if you have two children under the age of five, this means you may be looking at a term of 20 years. If they are closer to 15 on the other hand, a term of 10 years may be sufficient.

Step 3
Consider your needs
It’s the million dollar question – how much life insurance do you need? Unfortunately, there is no short answer to the question.
However, clearly the earlier you die, the more money your family might need to replace the money you brought home each month.
All things being equal – income, retirement age – if you die at 30, you need to replace an extra 10 years income than if you die at 40 because at 40 you’re 10 years closer to retirement.
As a rule of thumb, a sliding scale of 20 times income when you’re in your 30s, 15 times income in your 40s, 10 times in your 50s and five times income in your 60s. But bear in mind: this is just a rule of thumb. Everyone’s circumstances are different.

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