How Much Life Insurance? Try an Affordability-First Approach

If you’re wondering how much life insurance you need, you’ll find a lot of opinions as to what the “right” number is.

Some say 5-10x your annual income. Sounds simple, but is it right? Others ask you to fill out a complex calculator to estimate current and future assets and liabilities. Here’s a hint — the recommended coverage will be in the millions of dollars (no surprise).

So where does that leave you? The traditional path starts with the coverage amount (top-down approach) which determines your monthly premium. And that monthly premium may or may not fit your budget.

An alternative path, and one rarely applied in the life industry, is to start with your budget in mind (bottom-up approach). First see how much coverage you can afford and then adjust up or down as desired.

Let’s review both top-down and bottom-up approaches to see what works for you.

Top-Down Approach or Coverage-First

A highly simplified method is to multiply your current annual income by 5 or 10 depending on how many years of coverage you want to give. Why? It’s a measure of financial support through a transition period until your family presumably becomes self-sufficient again.

A more complex method is to calculate future financial needs including the immediate costs at the time of death, income replacement, debt, education, etc. Some calculators include inflation and tax-adjusted investment yields.

Add these up and voila! You probably get a really high coverage recommendation with a high monthly cost attached to it.

One example of this is a popular news site that recommended a $3.3 million policy for a healthy 35-year-old male earning $100,000 so his surviving family could invest it and live off the interest for the rest of their lives.

Interesting approach… but that policy would cost about $100 a month. If you’re ready to purchase millions of dollars of life insurance, more power to you. Most people aren’t. So while possibly a helpful data point it isn’t super practical.

Unfortunately, a coverage-driven estimate is one reason why so many people assume life insurance is just too expensive. In fact, 6 out of 10 millennials overestimated the cost of life insurance by 3 times on average[1].

They are talked into expensive policies only to cancel later because the cost was just too high. And despite initial demand, they end up not buying coverage at all.

You shouldn’t have to choose between paying the utility bill or life insurance.

Thanks coverage-first approach!

Bottom-Up Approach or Affordability-First

A more practical approach is first to determine how much you’d be willing or able to pay, find how much coverage that gets you, then adjust up or down if needed. No surprises and it’s a good balance of financial responsibility and wallet friendliness.

Here’s an example just to illustrate the point:

If the same 35-year-old healthy male earns $50,000 a year and budgets $7 per month for life insurance, that could get him roughly $100,000 of life insurance. Next he can consider whether the equivalent to 2 years of tax-free income is sufficient for his beneficiaries.

Or if he can afford $15 per month and get a $250,000 policy, then he could also cover debt (mortgage, credit card, auto and student loans).

Or he could just start with $100,000 policy today, so he’s covered now then revisit coverage options later.

It’s nice to have great choices that are all within reach of a few dollars.

Affordability-first means adequate financial protection to give your family a soft landing (not to mention peace of mind) without disrupting your lifestyle or making difficult tradeoffs.

With the right insurance partner, you can revisit coverage options later when you have higher income or different needs.

Just keep in mind that life insurance tends to get more pricey as you age. So revisit your coverage options every year, not every 10 years.

Protection for the Price of a Kid’s Meal (And More Valuable Than the Free Toy)

At Bestow, our goal is to provide amazing financial protection at a price everyone can afford. We offer technology-driven solutions that make it easier than ever to get coverage for your family.

Questions or want to talk? Our non-commissioned experts would love to help. By leveraging the latest in technology, Bestow eliminates significant costs and passes those savings along to you.

We cover this in more detail in a post about our affordable, instant, and trusted solution.

Calculating your life insurance needs can be confusing. With a well-rounded idea of how much coverage you need to give your family a soft landing, coupled with an affordability-first approach, you can still get excellent coverage now while not disrupting your lifestyle or wallet.

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Live with confidence knowing you’ve protected your family’s financial future. Apply for coverage today.

Citations

  1. “2017 Insurance Barometer Study”, annual study published by Life Happens and Limra that tracks the perceptions, attitudes, and behaviors of consumers in the United States.

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