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How to Choose the Right Amount of Life Insurance

Penelope Wang

Consumer Reports has no financial relationship with advertisers on this site.

Consumer Reports has no financial relationship with advertisers on this site.

For many people, the idea of buying life insurance brings to mind the annoying insurance agent Ned Ryerson in the 1993 comedy “Groundhog Day.”

“Do you have life insurance?” Ryerson asks the Bill Murray character, Phil Connors. “Because if you do, you could always use a little more. Am I right or am I right?”

Well, it turns out Ned may be right.

Although life insurance can be a crucial financial safety net for anyone with loved ones to support, more Americans are going with too little—or none at all. 

In 2016, only 44 percent of American households had individual life insurance, down from 62 percent in 1984, according to data from LIMRA, an industry association of more than 850 financial services companies.

There are various reasons for the decline. The LIMRA survey data shows that households are placing a higher priority on funding household expenses, such as rent or groceries.

And with longevity increasing for many—the average affluent man had a life expectancy of 89 years in 2010, up from 83 in 1980—the need for coverage may seem less urgent.

Many people put off buying a policy because they believe they have sufficient coverage through their employer, says Tom Fredrickson, a fee-only financial planner in Brooklyn.

“The problem is that your employer life insurance benefit is usually limited, perhaps one or two times salary, and you often lose it when you change jobs,” Fredrickson says.

So if you have family members who depend on you, take the time now to review your life insurance needs.

Given the complexity of these decisions, it’s a good idea to consult with a fee-only financial planner—one who has no direct interest in selling insurance—to help calculate your coverage needs and how to choose a policy.

You can find tips for choosing a financial adviser here and here. And to help you get started, here are answers to three frequently asked questions about life insurance:

How Much Coverage Do I Need?

When it comes to figuring out the right amount of life insurance to buy, it’s tempting to rely on rules of thumb, such as purchasing a multiple of your annual income—say, 10 to 15 times your salary—as a death benefit. That would at least ensure that your family received that income for a specific period of time. 

But chances are, online tools or a rule-of-thumb approach won’t provide the best answer for your financial situation, says Jocelyn Wright, certified financial planner and assistant professor at the American College for Financial Services.

“It’s important to run the numbers and look at the different obligations and needs your family will have,” Wright says.

If you have young children, for example, and your stay-at-home spouse needs to return to work, you may want to fund additional child-care costs, as well as college educations. You may have mortgage and credit-card debt to pay off, or elderly parents who need financial support.

It makes sense to subtract any savings or current coverage (if you intend to keep it) from your financial needs. But you will also want to increase the coverage amount to account for future inflation.

What's the Cheapest Way to Buy a Policy?

The simplest and cheapest option is term life insurance. You pay a yearly premium in return for a fixed death benefit that goes to your beneficiary if you die while the policy is in force.

With a term policy, you get the most benefit per premium dollar, says Steven Weisbart, chief economist of the Insurance Information Institute, an industry group that provides consumer information.

That frees up more of your cash flow for other expenses, such as for your kids’ college educations or for retirement savings.

For example, a 35-year-old nonsmoking man in good health might pay as little as $21 per month, or $252 per year, in premiums for a $500,000, 20-year level term policy, according to Quotacy, an online life insurance brokerage company. Upping that amount to $1 million would run $36 per month, or $432 per year.

By contrast, a 35-year-old healthy, nonsmoking female might pay somewhat less—$222 per year for a $500,000 policy, or $366 for $1 million in coverage.

If you have a life insurance benefit at work, you can consider increasing that coverage, if it’s an option. But be sure to shop around first, Fredrickson says, because it may be more affordable to buy it separately.

The sooner you make the purchase, the better, because the cost of premiums rises as you age and your risk of having health problems increases.

A 45-year-old healthy, nonsmoking man might pay $1,127 per year for a $1 million policy, and a 55-year-old may be charged $2,761, Quotacy’s data show.

Term life insurance does have a downside: It’s limited. A policy is typically purchased for a 10-, 20-, or 30-year term—after that, the coverage ends and you don’t get any of your money back.

When your term policy expires, you often have an option to convert it to permanent, or cash-value, insurance, which combines a death benefit with an investment account, as we explain below.

By converting, you avoid having to get a medical exam, as with a new policy. But this option will be more costly than your current term coverage. 

Should I Consider Cash-Value Insurance?

With a permanent life insurance policy, you generally get a death benefit as well as a savings or investment component. There are different types of cash-value coverage, including whole life and universal life, which offer varying investing options, carry higher costs, and are often complicated.

With whole life, for instance, only a portion of your premium goes to the death benefit, so you will generally have to pay a higher premium to get the equivalent benefit you would with a term policy. For example, that healthy 35-year-old man purchasing $500,000 in coverage might pay $5,160 per year for a whole life policy, vs. $252 for term, Quotacy reports.

Granted, a portion of your premiums would go toward the savings or investing account. But to come out ahead you will need to hold a cash-value policy for many years, says Glenn Daily, a fee-only life insurance adviser in New York City. If you surrender your policy in the first few years, before the value has built up, you may get little or no money back.

Permanent insurance may be worth considering for some families, such as those who want to provide for grandchildren or special-needs family members. But before you consider one of these policies, first make sure you have maxed out all your tax-deferred savings. “Fully funding your 401(k) and Roth IRA will give you growth with the most flexibility,” Daily says. 



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