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How Much Life Insurance Do You Need?

If you have dependent children you probably could use some life insurance. If you don't already have some, you're not alone. The majority of Americans lack this useful financial tool and ownership of individual policies have hit a 50-year low, according to a new survey by LIMRA, an industry trade organization.

The primary purpose of life insurance is to make sure your dependents are taken care of should something happen to you or your partner. While a lot us don't like to think about such situations, the reality is that many households would be in trouble without a good policy. Some 40% of families with children under the age of 18 say that they would not be able to meet their everyday bills if the primary breadwinner passed away, according to that same LIMRA survey. And 30% would have trouble keeping up with expenses after several months.

So why aren't parents buying life insurance? LIMRA says its because families are busy trying to meet other financial priorities, including saving for retirement and paying off debt. Insurance salesmen will tell you it's because folks don't like to contemplate their own demise.

Frankly, I don't buy either excuse. I think the real reason is because the buying process is just too darn complicated. Families don't know how to buy it, how much to purchase, and what type of policy is best for their needs.

I think I can help. Here are some very simple guidelines to get you started:

Buy Term Life
There are more than a handful of insurance products you could buy. Don't waste your time researching them. Purchase term life if you just want to provide coverage in case you are no longer around to support your dependents.

Term life will provide you with 10, 20 or 30 years of affordable coverage. A 40-year-old non-smoking male can purchase a $1,000,000 policy for just under $100 a month, according to AccuQuote.

Purchase Online or Through an Agent
Term life insurance is a bit of a commodity, so it doesn't matter if you buy it through a website like AccuQuote or a local agent. You just want to make sure that you're making the purchase through someone that sells policies from multiple carriers so you find the best deal for your circumstances.

One warning: individual agents make more money selling whole life policies so don't be surprised if you get the tough sell for this product. Whole life includes an investment component and is very expensive since it includes all sorts of fees.

Don't Skimp on Coverage
Most people underestimate how much coverage they need. As a rule of thumb, the industry will tell you to purchase five to 10 times your annual income. This is a pretty good start but I actually found that I needed quite a bit more if I wanted my policy to cover both of my kids' college educations.

Check out MetLife's insurance calculator to get a better handle on your needs. This useful tool takes your outstanding debt, mortgage and existing savings into consideration and should help you get a good feel for homwmuch you may need.

Finally, don't fall into the common trap of thinking that your employer's insurance plan is enough coverage for your family. Chances are the policy is quite small and it disappears once you leave your job.

For more on life insurance, check out my book The Wall Street Journal Financial Guidebook for New Parents.

Cousin Kim Newborn Baby image courtesy of Flickr, CC 2.0.
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