Life Insurance: Is $210,000 A Realistic Figure?

Life insurance is a financial tool that can help provide for your loved ones after your death. The amount of coverage you need depends on several factors, including your age, income, mortgage and other debts, and anticipated funeral expenses. A common rule of thumb is to get coverage worth at least 10 times your annual salary. For example, a 20-year, $250,000 term life insurance policy for a healthy 30-year-old costs an average of $12 to $14 per month. The cost increases with age, with a similar policy for a 50-year-old costing around $32 to $40 per month. Life insurance is generally cheaper the younger and healthier you are, and certain hobbies and habits, such as skydiving and smoking, can also affect your premium.

Life insurance for a healthy 30-year-old costs $12-14 a month on average

Life insurance rates vary depending on factors such as age, gender, type of policy, coverage amount, and length of coverage. According to Forbes Advisor, a 20-year, $250,000 term life insurance policy for a healthy 30-year-old costs an average of $12 to $14 per month, or $144 to $162 per year. The same policy costs more for a 40-year-old, at $16 to $19 per month, and even more for a 50-year-old, at $32 to $40 per month.

The younger and healthier you are, the less you'll pay for life insurance premiums. Life insurance rates are primarily based on life expectancy, with insurers classifying applicants into categories like super preferred, preferred, and standard, with rates calculated based on risk class. Age is a significant factor, as the likelihood of an insurer having to pay out a policy increases with age. Gender is also a factor, as women generally have longer life expectancies than men.

Other factors that can affect life insurance rates include smoking status, health, family medical history, driving record, occupation, and lifestyle. Life insurance companies aim to determine how long you are likely to live and calculate quotes based on this estimation.

It's important to note that life insurance rates can vary across different insurers, so it's recommended to compare quotes from multiple companies to find the best rates. Additionally, there are different types of life insurance policies, such as term life insurance and permanent life insurance, each with its own cost structure. Term life insurance is generally cheaper as it covers a set number of years without building cash value, while permanent life insurance typically lasts a lifetime and includes a cash value component, making it more expensive.

The older you are, the more you'll pay for life insurance

Life insurance is designed to pay out a death benefit to the person or persons you name as beneficiaries when you pass away. In exchange for this coverage, you pay a premium to the life insurance company. The likelihood of a payout occurring increases as you get older, so the cost of life insurance tends to rise with age.

How life insurance rates are determined

Life insurance companies use a few different criteria to calculate your premium. Some of the most significant ones include your age, overall health, gender, lifestyle factors (e.g., your job or hobbies), the type of life insurance policy you need, and the amount of coverage you choose.

Age and life insurance premiums

Age is one of the primary factors influencing your life insurance premium rate, whether you're seeking a term or permanent policy. Typically, the premium amount increases, on average, about 8% to 10% for every year of age; it can be as low as 5% annually if you're in your 40s and as high as 12% annually if you're over 50.

With term life insurance, your premium is established when you buy a policy and remains the same every year. With some permanent life insurance policies, the premium rises every year.

Age also affects whether a person will qualify for life insurance coverage at all, with qualifying medical exams getting increasingly stringent. The older you are, the more likely you are to become ill or die while under coverage.

How to get cheaper life insurance

• Keep a healthy weight: Being overweight is linked to medical conditions with higher mortality rates, so staying within a healthy weight range can make you less risky to insurers.
• Manage your medical conditions: If you have an ongoing medical condition, make sure you're following up with your doctor and sticking to your treatment plan.
• Stop smoking: This includes using e-cigarettes, which most insurers view the same as smoking. The longer you go without smoking, the better your rate could be.
• Avoid high-risk hobbies: The less frequently you engage in high-risk activities, the lower your rate could be.
• Apply early: The cost of a term life insurance policy is typically higher for someone who applies in their 40s or 50s compared to someone who takes out a policy in their 20s or 30s.

The best age to purchase life insurance

The best time to buy life insurance is as soon as you realize you need it. For example, some people purchase life insurance when they get married, buy a home, or have their first child. Life insurance will be less expensive when you are younger and healthier. If you will need life insurance coverage in the future (e.g., you plan to have a family or send a child to college several years down the road), it may make sense to get it while you are younger to reduce your annual premiums.

Life insurance can help cover funeral costs, pay off debt, and replace lost income

Life insurance is a contract under which an insurance company agrees to pay a specified amount after the death of an insured party, as long as the premiums are paid. The payout amount is called a death benefit. Policies give insured people the assurance that their loved ones will have financial protection and peace of mind after their death.

Life insurance can be used to cover funeral costs, pay off debt, and replace lost income. Here's how:

Covering Funeral Costs

Burial insurance, also known as funeral insurance or final expense insurance, is a type of life insurance policy that can be used to cover funeral expenses. The average cost of a funeral and burial in the United States is $7,848, and if you get a vault—required by many cemeteries—that number rises to $9,420. The average cost of a funeral and cremation is slightly lower, at $6,971. Burial insurance can help ease the financial burden on loved ones by covering these costs.

Paying Off Debt

Life insurance can also be used to pay off any outstanding debts left behind, such as credit card debt, medical bills, and mortgage loans. This can help prevent the passing of substantial debt to surviving family members.

Replacing Lost Income

Life insurance can replace lost income for dependents. It is recommended to have enough coverage to replace at least 10 years of your salary. For example, if you earn $40,000 per year, you should aim for a policy payout of $400,000 to replace your income for at least a decade.

Additionally, life insurance can help cover the cost of replacing services provided by a stay-at-home parent, such as childcare.

When calculating how much life insurance you need, it is essential to consider your financial obligations, such as mortgage payments, college fees, and funeral costs, and subtract your assets. The remainder is the gap that life insurance will need to fill.

The amount of life insurance you need depends on your financial goals and family situation

• Income replacement: If you're the primary breadwinner, consider how many years' worth of income you want to replace. For example, you may want to ensure your family can maintain their standard of living for at least a decade after your passing.
• Mortgage and debts: Calculate the outstanding balance on your mortgage and any other significant debts, such as student loans or car loans. Your life insurance payout should be enough to cover these expenses, ensuring your loved ones don't inherit your financial burdens.
• Children's education: Factor in the cost of your children's education, including college tuition and fees. This ensures they have the financial support to pursue their educational goals even in your absence.
• Funeral and final expenses: The cost of funerals and final expenses can be significant. Life insurance can help cover these expenses, alleviating the financial burden on your family during a difficult time.
• Inflation: Consider the impact of inflation on your coverage amount. Your policy's payout should ideally include a buffer to protect against the erosion of purchasing power over time.
• Spouse's coverage: If you're married, consider whether your spouse also needs life insurance coverage, even if they are not the primary breadwinner. Their contribution to the household, whether financially or through unpaid labour, should be accounted for.
• Health and age: Generally, the younger and healthier you are, the lower your premiums will be. However, older individuals can still obtain life insurance, although it may be more expensive.
• Financial goals: Your financial aspirations, such as leaving an inheritance or establishing a trust, should be considered when determining the appropriate amount of life insurance coverage.
• Business ownership: If you own a business, life insurance can provide financial protection for your company and your business partners. It can help ensure the continuity of the business and safeguard your partners' interests.

While there are rules of thumb, such as multiplying your annual income by 10, these may not always provide an accurate estimate of your unique needs. It's advisable to use a detailed life insurance calculator or consult a financial professional to help you assess your specific circumstances and determine the right coverage amount.

You can calculate your life insurance needs by adding up your debts, future expenses, and desired income replacement

While it is challenging to pinpoint the exact amount of life insurance one should buy, it is possible to make a good estimate. The amount of life insurance you need is determined by your financial and family situation. If you are the primary provider for your dependents, you should consider getting enough life insurance to cover your debts and future expenses, as well as replace your income. Here are some steps to calculate your life insurance needs:

Calculate your financial obligations:

Add up your long-term financial obligations, such as your annual salary, mortgage balance, future needs like college fees and funeral costs, and any other debts you may have, such as car loans, credit card debt, or student loans. Consider using the DIME (Debt, Income, Mortgage, Education) formula, which takes into account these four key areas when calculating your financial obligations.

Determine the number of years you want to replace your income:

Consider how many years your family would need financial support if you were to pass away. This is especially important if you have young dependents. Multiply your annual income by the number of years you want to replace that income.

Factor in inflation and salary increases:

It is unlikely that your earnings will stay the same over time. Account for factors such as inflation, merit increases, promotions, or other salary growth. You can use the long-term average inflation rate of approximately 3% or choose a higher or lower rate depending on your expectations for the future.

Subtract your assets and liquid assets:

From the total amount of your financial obligations, subtract your current savings, investments, and any existing college funds or life insurance policies. This will give you an estimate of the gap that life insurance will need to fill.

Consider your immediate and future needs:

Remember to consider both your immediate and future needs. You may need to adjust your calculations depending on the age of your dependents. For example, someone with older dependents may not need to calculate as many years of income replacement as someone with young dependents.

By following these steps, you can estimate the amount of life insurance coverage you need to protect your loved ones and ensure their financial security.

Frequently asked questions