Life Insurance: How Many Policies Do You Need?

Life insurance is a financial safety net that provides financial protection for your loved ones in the event of your death. While one policy is usually enough, there are several reasons why you may want to consider having multiple life insurance policies.

Firstly, life insurance coverage needs can change over time. For example, when a couple gets married, they may want a certain level of protection. As they have children, they may want to add more substantial coverage. However, later in life, when the children are independent, the parents may opt for less coverage that will last longer or for the rest of their lives.

Secondly, one life insurance policy may not be enough to meet all your needs. There are different types of life insurance policies, such as term life and whole life insurance, each with varying features. For instance, a term life policy does not allow you to withdraw cash value while you are alive, whereas a whole life policy does.

Additionally, life insurance can be used for estate planning, providing a clear and undebatable way to state beneficiaries and manage and distribute assets. It can also help cover final expenses, such as funeral and medical costs, ensuring your family is not burdened with these financial responsibilities.

Furthermore, life insurance can be beneficial for small business owners, providing financial support for the business and the owner's family in the event of their death.

While there is no limit to the number of life insurance policies you can have, there is a maximum to the total dollar amount of coverage you can obtain, usually based on your income and age. It's important to assess your financial goals and needs to determine if multiple life insurance policies are right for you.

How much life insurance do I need?

The amount of life insurance you need depends on your financial goals and needs. If you have loved ones who depend on your income, you should consider getting life insurance. The point of life insurance is to replace your income if you die, so your dependents can maintain their standard of living.

There are several rules of thumb to help you calculate how much life insurance you need:

• Human Life Value (HLV) Theory: This suggests that you multiply your income by a variable based on factors such as age, occupation, projected working years, and current benefits. For example, a person in their 30s may be insured for around 30 times their annual income, whereas someone over 60 should consider insurance based on their net worth.
• Multiply your income by 10: This is a simple way to calculate a ballpark figure, but it doesn't take into account other factors such as debts, mortgage, or educational costs.
• DIME formula: This takes into account your debt, income, mortgage, and education. You add up all your debts (excluding mortgage), calculate how much income your family would need, get the payoff amount for your mortgage, and estimate the cost of your children's education.
• Years-until-retirement method: Multiply your annual salary by the number of years left until retirement. For example, if you are 40 and plan to retire at 65, multiply your annual salary by 25.
• Standard-of-living method: This is based on the amount of money survivors would need to maintain their standard of living if the insured party dies. If you are between 41 and 50, multiply your annual salary by 20; if you are between 51 and 60, multiply it by 15.

You can also use a life insurance calculator to get a more accurate estimate. These calculators take into account your age, gender, relationship status, number of children, and annual salary.

What is life insurance and why do I need it?

Life insurance is a contract between an insurance company and a policy owner. The policyholder pays premiums to the insurer during their lifetime, and in exchange, the insurance company guarantees to pay a sum of money to one or more named beneficiaries when the insured person dies. This payout is known as a death benefit.

Life insurance provides financial security to your loved ones after you're gone. It can help your dependents cover living expenses, pay off debts, and pay any medical or final expenses. It can also help your family maintain their standard of living by replacing lost income.

The amount of life insurance coverage you need depends on your unique situation, obligations, and priorities. Factors to consider when determining the right amount of coverage include your age, income, family situation, financial obligations, and other assets.

There are two main types of life insurance: permanent and term. Permanent life insurance policies do not have an expiration date, meaning you’re covered for life as long as your premiums are paid. Term life insurance, on the other hand, only covers you for a set number of years and does not accumulate cash value.

When deciding whether to purchase life insurance and how much coverage you need, consider your financial goals and needs, as well as the number of dependents you have. Life insurance can provide peace of mind, knowing that your loved ones will be taken care of financially if something happens to you.

How is life insurance calculated?

The premium rate for a life insurance policy is based on two underlying concepts: mortality and interest earnings. A third factor is the expense factor, which covers the operating costs of selling insurance, investing premiums, and paying claims.

Mortality tables are used to give the insurance company a basic estimate of how much money it will need to pay for death claims each year. By using a mortality table, a life insurer can determine the average life expectancy for each age group. This helps to predict the cost to each member of the group.

The second factor, interest earnings, refers to the money insurance companies make by investing your premiums in bonds, stocks, mortgages, real estate, etc. The third consideration is the expenses of operating the company, including salaries, agents' compensation, rent, legal fees, etc. The amount charged to cover each policy's share of these expenses is called the expense loading.

There are several rules of thumb for calculating the amount of life insurance coverage you'll need. These often involve multiplying your current income by a number such as 10 or by the number of years left until your retirement. Other rules of thumb involve adding up all expenses and obligations you would need to cover for your family.

• The Years-Until-Retirement Method: Multiply your annual salary by the number of years left until retirement. For example, if you are 40 years old and make $20,000 a year, you will need life insurance worth $500,000 (25 years x $20,000) to reach age 65.
• The Standard-of-Living Method: This method is based on the amount of money survivors would need to maintain their standard of living if the insured party dies. If you are between 41 and 50 years old, take that amount and multiply it by 20. If you are between 51 and 60, multiply it by 15. The idea is that survivors can withdraw 5% from the death benefit each year while investing the death benefit principal and earning 5% or more.
• The Debt, Income, Mortgage, Education (DIME) Method: This method is meant to provide a minimal amount of coverage that will cover family expenses in the event of an untimely death. With the DIME approach, your coverage should be enough to cover all your outstanding debts (including your mortgage), pay for your children's education, and replace your income until your children turn 18.
• The 10 Times Income Method: Most insurance companies say a reasonable amount for life insurance is at least 10 times your annual salary. So, if you make $50,000 a year, you would opt for $500,000 in coverage. Some recommend adding an additional $100,000 in coverage per child.
• The Replacement Income Method: Your policy's payout should be large enough to replace your income, plus a little more to hedge against the impacts of inflation on purchasing power.
• The Manual Calculation Method: Add up your long-term financial obligations, such as mortgage payments or college fees, and then subtract your assets. The remainder is the gap that life insurance will have to fill.

It's important to note that the amount of insurance you need depends on your individual circumstances, such as your age, health, lifestyle, and financial and family situation.

What are the different types of life insurance?

There are two overarching types of life insurance: permanent and term. However, within these two categories, there are several other types of life insurance that cater to specific coverage needs.

Term Life Insurance

Term life insurance is a temporary type of policy that provides coverage for a set term or a specific amount of time. It is a simple, low-cost policy, and its main purpose is to replace your income when you die. Coverage amounts vary depending on the policy but can go into the millions. Most people buy term life insurance for a length long enough to cover their prime working years. That way, if they die early, they can help a surviving spouse or other beneficiary meet short-term financial needs like paying off a mortgage or supporting their kids through college.

Whole Life Insurance

Whole life insurance is a type of permanent life insurance that provides coverage for your entire lifetime, paying your benefit no matter when you pass away — as long as you keep paying your bill. Whole life insurance also includes a savings component that a portion of your premium will pay into. The savings component has a fixed interest rate that builds cash value over time, which is part of the reason whole life policies typically cost more than term life policies with similar coverage.

Universal Life Insurance

Universal life insurance is another permanent life insurance option, providing coverage for your entire life as long as you pay the premiums. It's sometimes called adjustable life insurance because it offers more flexibility than a whole life policy. For example, universal life policies allow you to increase or decrease your death benefit and even adjust or skip your monthly premium (within certain limits).

Variable Life Insurance

Variable life insurance is a riskier type of permanent life insurance. It is tied to investment accounts, such as bonds and mutual funds, and the cash value can rise and fall based on your payments and the performance of your selected investments.

Final Expense Life Insurance

Final expense life insurance is a type of whole life insurance that offers a smaller and more affordable death benefit designed to help cover your end-of-life expenses like funeral costs, medical bills, or outstanding debt. While other types of life insurance may have age and health requirements, final expense policies can be easier for older or less-healthy individuals to qualify for.

Other Types of Life Insurance

• Group life insurance is typically offered by employers as part of their workplace benefits.
• Mortgage life insurance covers the current balance of your mortgage and pays out to the lender, not your family, if you die.
• Credit life insurance pays the balance of a specific loan, like a home equity loan.
• Accidental death and dismemberment insurance covers you if you die in an accident, such as a car crash.
• Joint life insurance insures two lives, usually those of spouses, under one policy.

When is the best time to get life insurance?

The best time to get life insurance is as soon as possible, especially if you can lock in a low rate. This is because the younger and healthier you are, the lower your premium will be. As you get older, not only does life insurance become more expensive, but it can also be harder to get your policy approved by an insurance underwriter. If you wait too long, you also run the risk of deteriorating health, which may further raise your rates or make you ineligible for some life insurance policies.

For this reason, it is recommended that you buy life insurance before starting a family or even a few years before, to make it more affordable in the long run. If you are a parent, your life insurance needs can change, and you may need to increase your death benefit amount to consider how much your spouse or partner would need to raise your children on their own, including higher education costs.

If you are single with no children, life insurance may not be a priority. However, if you have debt that your estate would be responsible for after your death, you should consider a life insurance policy. Life insurance is also for single people, as the death benefit can be used to cover final expenses, pay off debts, or generally support your beneficiaries.

If you are a senior, your physical health when you retire, as well as your projected income and financial obligations, can help you decide what type of policy and payout amount you need. Note that life insurance for smokers and people with medical conditions can be more expensive and may have fewer policy options.

Frequently asked questions