Life insurance is a contract in which a policyholder pays regular premiums to purchase the right for specified beneficiaries to receive a lump-sum benefit upon either the policyholder's death, or after a specific amount of time has elapsed. Life insurance is often purchased to provide financial security for family members in the case of unexpected events by replacing lost income and covering expenses.
Life insurance is also a broad category of complex financial products. Policy cost and benefit amounts differ greatly from person to person based on a set of variables that change depending on the company issuing the insurance policy and the various features of the policy. My Financial Plan uses a sample policy to help you estimate the costs and benefits of a term life insurance policy, but this is just a sample policy. Your actual insurance policy, the related costs and benefits, and the potential impact on your financial plan will differ from this estimate. To identify a policy that is right for you, we recommend you consult a licensed insurance broker. We are not licensed to sell or recommend insurance.
That said, we believe this event may help you estimate the costs and benefits of a term life insurance policy.
Using the Estimate life insurance event
In My Financial Plan, you can add an Estimate Life Insurance life event, where you can specify the start date, term length and policy amount of the life insurance you would like to purchase. When setting up this event, the decision of how much to purchase is a difficult one. To get you started, here are a few approaches you can consider:
- Investopedia reports that most financial advisors recommend purchasing 10 to 15 times your income.
- To dive deeper into your specific case, you could use an online tool to help determine how much life insurance is necessary. Generally, these online tools calculate your assets (cash, investments) and subtract both your family's projected spending (education cost for children, family expenses that require support) and your long-term debt obligations (loans, mortgages). If there is a negative gap, this is the minimum amount that your life insurance should fill.
- Consider adding a projected period of missing income into your calculations.
- Consider factoring in your final costs (funeral spending, for example) in your calculation of future spending.
The way My Financial Plan estimate the costs of a term life insurance policy is as follows:
- The base coverage to monthly premium ratio is 20,000:1. All other factors being equal, $20,000 of term life coverage will cost you $1 per month for the length of the policy. We call this the “base cost” below.
- If you select your gender as “Female”, your policy will be 90% of the base cost.
- If you select your health as “Excellent”, your policy will be 90% of the base cost. If you select your health as “Good”, your policy will be 95% of the base cost. If you select your health as “Poor” your policy will be 105% of the base cost.
- If you select a term length of “10 years” your policy will be 40% of the base cost. If you select a term length of “20 years” your policy will be 75% of the base cost.
- If your age is under 29, your policy will be 25% of the base cost. If your age is 30 to 39, your policy will be 75% of the base cost. If your age is 40 to 49, your policy will be 100% of the base cost. If your age is 50 to 59, your policy will be 125% of the base cost. If your age is 60 to 69, your policy will be 175% of the base cost. If your age is 70 to 79, your policy will be 300% of the base cost. If your age is over 80, your policy will be 1000% of the base cost.
There will undoubtedly be various factors specific to your personal financial situation that cannot be accounted for using a generalized approach. Nonetheless, these tips offer you a starting point to estimate the amount of life insurance that may be appropriate for you and your family.