Another is 15 years from now when your younger kid heads off to college. One is 17 years from now when you pay off your mortgage. College today costs upward of $320+ at many private universities and is growing ~5% annually. Say you also have two kids, 3 and 8, for whom you want to save for college. It may be cheaper to “ladder” two or more policies together to lower your overall premiums while still fulfilling your coverage needs.įor example, say you’re 38 and you have a mortgage with $400k left on it, and you expect to pay it off in 17 years. You may realize after doing an analysis that it doesn’t make sense to buy one single big policy. So when you calculate how much insurance you need, take these movements into account. Your life insurance should mirror and adjust accordingly, because you’ll be paying your policy for many years. Expenses go up with (at least) inflation. Your debts and major expenses are not static. This shortcut is imprecise and inaccurate. Most blog posts, in a hand-wavy way, suggest that you add up all your mortgages, student loans, and other debts, along with your kids’ expected college costs and maybe your family spending to “ballpark” how much insurance to buy. How to calculate exactly how much life insurance you need That’s why the most basic type of life insurance, term life, expires after a set period, usually 10, 15, 20, or 30 years. Unless you have a special situation (e.g., dependent with lifetime special needs), at some point you probably won’t need life insurance anymore. You’ll have paid off your mortgage, sent your kids to college, built a nest egg. So as you get older, you need life insurance less. The older you are, the riskier you are to the insurer, but also the less valuable life insurance is to you because you’re more likely to be financially independent, debt-free, and self-insured. At the same time, it’s less risky to the insurance company because young people are generally healthier. Generally, the younger you are, the more valuable life insurance is, and therefore the more risky it is to ignore it, because the less likely it is you’re financially independent. Think about if you had a jumbo mortgage, student loans, car payments, three pre-college kids, a stay-at-home spouse. The bigger your obligations, and the more dependents you have, the more valuable life insurance is. This is especially reassuring if you’re the sole breadwinner. They get peace of mind their dependents won’t go through severe financial stress (on top of emotional stress) if you die. Most people won’t die during their life insurance contract, so they’ll get nothing. The basic idea of life insurance is: pay the insurer a little each month, and if you die the insurer pays your beneficiaries a big death benefit. First, how to think about life insurance in general return of premium insurance is more cost-effective. I’ll also show you how to calculate whether regular term life vs. So in this article, I’ll share my framework for how to do this exact calculation. Knowing how to do this will give you a far clearer picture of exactly how much insurance you actually need. What the blog posts are missing is a guide to help you calculate – quantitatively and precisely – how these expenses change over time. Some decrease, others fluctuate, others increase. The problem is: you shouldn’t just add these up because they all behave differently. They’ll say something like: “Add up your mortgage, kids’ college expenses, credit card debt, student loans, other major debts, and annual spend – that’s a rough estimate of how much insurance you need.” So I won’t focus on that here.īut I also noticed most blog posts are hand-wavy when it comes to advising you on how to think about how much life insurance you need. Luckily, there’s a lot of blog posts out there explaining the nuances between these different products. There’s a lot of different types of life insurance products: term life, whole life, return of premium, universal, universal index, variable, variable universal, survivorship, mortgage protection, final expense. When my baby was born, I started thinking about all kinds of grown up things I never thought about before. Calculate exactly how much life insurance you need with our Life Insurance Calculator Spreadsheet
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