So, you’re looking to protect your loved ones with life insurance coverage if you’re not around to provide for them. Smart move. Life happens and a life insurance policy can help us feel better about the unexpected.
You’re probably curious what life insurance costs, and what you get for the money. By comparing several carriers and deciding which plan works best for your family, you can typically find coverage that fits your budget.
How Much Life Insurance Do I Need?
Several factors can contribute to the amount of life insurance you need. From your current financial situation to your future financial obligations. Are you looking for several years of income replacement or aiming to cover specific future expenses like housing, education, or child care.
There is no one-size-fits-all formula when trying to determine the coverage your family needs. But there are several common methods to calculate your coverage.
- Income multiplier – Advisors typically recommend 5-10X your annual salary, and often adding an additional $50,000 -$ 100,000 for each child
- Debt estimation – Here, you tally the outstanding debt you have (mortgage, student loans, credit cards) and add the cost of final expenses with any additional expenses you want to cover (ie: children’s college).
Deciding Your Type of Life Insurance
There are two primary types of life insurance: whole and term. The basic differentiators are how long they cover you and how much they cost. But the reasons you choose between life insurance products are very personal and based on your family’s life insurance needs.
Whole Life Insurance
Whole is often referred to as permanent or universal life insurance. You purchase it today and when you pass (which, spoiler, you inevitably will) your beneficiaries get a payout. Because the death benefit is guaranteed, the price you pay is typically significantly higher than a term policy.
Term Life Insurance
Term life insurance lasts as long as you and the insurer agree. You can purchase policies for 20 years. or more commonly, 30. You decide how much insurance coverage you need and the term length and make payments for the duration of the term. When it expires, so does your coverage.
The money you’ve paid in does not get paid out. That’s what usually makes this option far more affordable for most families. And it’s a great way to cover the length of a mortgage or the time period your children depend on you financially.
What’s The Average Cost of Life Insurance?
Insurance rates depend on a variety of factors, including your age, health, how much life insurance coverage you need, and of course where you buy.
A $500,000, 20-year term life policy for a healthy 35-yr old female may be had for under $30/mo. with some carriers (As little as $22.97/mo. at Bestow*). That’s less than $1/day. But if you’re looking for a larger policy, around $1 million, and want 30 years of coverage (the length of your mortgage, for instance) you’ll likely find yourself paying much more.
Whole life insurance can be 3-5X more expensive. That’s a big gap, and why you should consider getting a few different quotes.
How We Calculate Your Life Insurance Cost
Bestow uses thousands of data points to determine eligibility and rate, including everything from your health history to your risk factors (do you recreationally pilot planes?).
You’ll get a preliminary quote based on your gender, age, and preliminary health data. You can explore your options by tinkering with term length and coverage amount.
Age
The younger you are, the more likely you’re in prime health. And the farther from death you are. You’re more likely to get our most affordable rates in your 20s. But your annual income usually increases as you age, so you’ll want to reevaluate your needs over time.
Gender
Women typically pay a little less than men for life insurance simply because the data shows they have a longer life expectancy.
Health & Lifestyle
Insurers will ask a variety of health and lifestyle questions to determine if you’re eligible for coverage and how much you might be eligible for. Not everyone qualifies for the same coverage.
Term Length
The longer you want to be insured, the more a policy will cost. You’ll age more in a 30-year policy than in a 10-year and the insurer is taking on a greater risk. You’re still likely to get a lower rate by buying a 30-year policy at 25, than a 20-year at 35.
Coverage Amount
You get what you pay for. If you want $1 million, you’ll pay a larger monthly premium than if you select a $50,000 policy (or even smaller to simply cover funeral costs). If you’re looking to cover credit card debts, future educational needs, student loans, housing or more, you could find yourself easily paying more than a hundred dollars a month, possibly several hundred for whole life insurance.
Example Life Insurance Calculation
There are two commonly used ways to calculate desired coverage.
The first is income multiplied. This can range anywhere from 5-10X your annual salary. The biggest factor in determining this is often how much income a spouse or partner provides in relation to cost of living expenses. The primary breadwinner may opt for 10X salary + up to $100k for each child to ensure their unexpected needs are covered. While a partner who contributes less may elect for less coverage.
A more exacting way many advisors use to recommend coverage amounts is called the D.I.M.E. formula and involves a little math. When you’re calculating the amount of life insurance coverage you need, start with all the relevant numbers. It will help to have a pretty good sense of your family’s financial assets and needs, including the following:
Annual salary for each adult in the household
Debts and Expenses
- Mortgage balance
- Annual childcare costs
- Credit card debt
- Other personal loans
- Expected final expenses
Future expected costs
- Higher education expenses
- Miscellaneous living expenses
Then grab a calculator. The D.I.M.E. formula stands for debt, income, mortgage and education.
- Debt and final expenses: Add all your debts, excluding mortgage, then add funeral expenses.
- Income: Determine the number of years your family would need support, then multiply your annual salary by that number.
- Mortgage: What is the outstanding amount due on your mortgage?
- Education: Do you plan to fund your children’s K12 or higher education? Cost for 4-year public universities can exceed $150k.
After you’ve calculated your needs, level set by accounting for your savings, retirement accounts, and existing life insurance (from work or a veterans organization). There may already be money coming to your family without your salary contribution. Subtracting that amount from your expenses can lower the amount of coverage you need and dramatically reduce your premiums.
Also consider your desired term length. If you’ve got small children or a recent mortgage, a 30-year policy might be right. If you’re a little older and have teenagers or 20-something children, without major debt, consider a term length that matches your expected retirement date (when your IRA or retirement savings account might kick in). Term length will have an impact on premium price.
Lastly, remember that stay at home parenting has a real value. A recent study by salary.com estimated the value of childcare, home keeping, meal planning, cooking and cleaning at as much at $184,820/annually. Often, stay at home parents don’t qualify for life insurance without an income. But at Bestow, lack of income isn’t necessarily a disqualifier. And women (both working and in the home), despite reporting lower incomes than men, routinely purchase more insurance coverage (as a percentage of their income).
Financial advisors universally agree on one thing: some coverage is better than none. Even if it’s just enough to soften the blow of your loss and ease the financial burden of your financial expenses.
Having a life insurance policy is important, and if you discover later that your life or needs have changed, you can purchase more coverage (or with some carriers, increase your coverage).
Start Your Life Insurance Calculation with a Free Estimate
Don’t let the math intimidate you. Get started today with a fast, free term life insurance quote from Bestow in just seconds. Easily get a sense of what you might pay for varying amounts of coverage.
1Quote shown is an estimate based on a healthy, non-smoking 35-year old female (12/8/2022)
