If something happens to you during your prime earning years, your loved ones don’t just lose you—they also lose the financial future you’ve been building. If you have a partner, children, or elderly parents who depend on you for support (financial or otherwise), then term life insurance can be a great way to secure their financial future by providing them with a safety net should the unexpected happen.
Personal finance experts recommend that you have savings and/or coverage that is at least ten times your annual salary. If you have already built up enough savings to provide that safety net on your own, then you may not need term life insurance.
If not, getting term life insurance can ensure that your family’s future is safe, no matter what.
With Ethos, you can apply for life insurance in just minutes. Upon completing the application, some applicants are approved instantly for coverage! Otherwise, our underwriting process usually only takes about 7-10 business days to complete.
It’s different for everyone. In general, you can find your ideal coverage amount by calculating your long-term financial obligations and then subtracting your assets. The remainder is the gap that life insurance needs to fill. But it can be difficult to know what to include in your calculations, so we created a term life insurance calculator to help you determine your coverage needs.
There also are a few rules of thumb that can help guide you. One rule of thumb is to simply multiply your annual income by 10. With that said, some is better than none. You can also use the DIME formula as a starting point in calculating your life insurance needs. DIME is an acronym for Debt, Income, Mortgage and Education.
- Debt- Total monetary value of all debt (student loans, credit cards, car loans, etc.) You’ll also want to include funeral expenses in that debt figure.
- Income- Take your annual income and multiply it by the number of years your family will need the support (i.e until your youngest child reaches a predetermined age, such as 18, 21, or 25). For example, if you make $50,000 per year after taxes and your youngest child is 10 and you want income protection until he or she is 21, then the income formula would be $50,000 x 11 years = $550,000. If you’re a stay-at-home parent, include the cost to replace the services that you provide, such as child care.
- Mortgage- Having enough life insurance can help keep your family in your home. With this step, simply add up the remaining balance on your mortgage. If you are renting, consider adding 10 years of rent income to your plan as a substitute.
- Education- Determine the cost of sending your children to college or private school. It is common to estimate $100,000 per child for a four-year university education at a state school. That includes tuition fees, room and board, and books.
Employer-sponsored life insurance is a great benefit, but it's usually not enough coverage to protect most families. Most employer-sponsored policies offer coverage that is one to two times your annual salary. So if you make $50,000 per year, your employer may offer $100,000 in life insurance coverage at very little cost to you. While this is helpful, the amount you really need is the total amount your family needs to replace your income for years to come. Many financial experts recommend that you have coverage that is actually 10 to 12 times more than your annual salary. Or enough to replace your income for X years and help pay for expenses or services you used to provide, like living expenses, child care, college expenses, bills, and mortgage payments.
The other disadvantage is that most policies through work only last as long as you are employed there. Many people tend to lose their insurance coverage when they change jobs, are laid off, or when they retire. Which could mean losing your insurance when you need it most.
In most cases, the death benefit is not taxed. That said, if you are doing something less common like distributing the death benefit in installments while investing it, or including the benefit as part of an estate, there may be tax penalties for the beneficiary. Make sure to check with an accountant or financial advisor if you think this may apply to you.
Typically, life insurance payouts are used to cover expenses like home mortgages, burial expenses, college tuition, existing debt, medical bills, living expenses, cosigned debt, or any other expenses your loved ones may have.
That said, your beneficiaries ultimately decide how to use the cash payout.
A beneficiary is the person, will, or trust designated as the recipient of the funds after a claim is made on the life insurance policy.
A life insurance policy is a contract between you and an insurance company. In that contract, you agree to make payments (premiums) to the insurance company for a specified period of time (sometimes for the duration of your life), and the insurance company agrees to provide a lump-sum cash payout ("death benefit") in the event that you die within the duration of the policy. The contract is legally binding and government regulated.
A premium is the price you pay to the life insurance company to secure your coverage amount. It can be paid monthly, twice a year, or annually depending on your preference. If you continue to make premium payments, the insurance company must meet their obligation to provide your beneficiaries with the stated benefit in the event of your passing.
A beneficiary is a person (or persons) who will receive the proceeds of the life insurance policy when the insured person dies. You can name one person or multiple people as beneficiaries when you select a policy, but you will usually only have one primary beneficiary.
You are not locked into a life insurance policy, and can typically terminate it by ceasing to pay the premiums.
A death benefit is the amount of money that an insurer pays to your beneficiary if you pass away during the policy term. Typically, it is paid in a single lump sum and is untaxed.
Term life insurance is the most simple and affordable option. It provides coverage for a set amount for a set period of time or “term”, typically 10–30 years, and is designed to protect your dependents. If you pass away during the term period, your beneficiaries receive a cash payment (the "death benefit") to cover any expenses.
There are two types of life insurance: term life insurance, and permanent life insurance.
Term life insurance is the most simple and affordable option. It provides coverage for a set period of time or “term”, typically 10–30 years, and is designed to protect your dependents. If you pass away during the term period, your beneficiaries receive a cash payment (the "death benefit") to cover any expenses.
Permanent life insurance is complex and costly (often ten to fifteen times more expensive than term life insurance). It provides coverage in a set amount for your entire life and is sometimes used as an investment vehicle. Some insurers invest your premium payments and the interest earned on those investments goes back into your policy as accrued cash value. Please note: when choosing this type of policy, you should be prepared to assume meaningful levels of risk.
Some permanent life insurance policies let you borrow against the accrued cash value (surrender the policy for a cash payment). But if you don’t repay the amount borrowed with interest before you pass away, the amount paid to your beneficiaries will be reduced.
Because our mission is to protect vulnerable families, Ethos offers term life insurance and recommends it particularly if:
You need coverage to replace your income over a fixed period of time (like when you’re raising children or paying off a mortgage)
You want the most affordable coverage
You want a more streamlined and straightforward process
It's recommended to choose a term length that covers you while you're most vulnerable. You can consider choosing a term length that covers you for the length of your mortgage or until your children are independent.
Underwriting is the process of conducting research and assessing the degree of risk for each applicant before the carrier takes on that risk. This process helps to set fair premiums to adequitely cover the true cost of insuring policyholders.
Life insurance increases as you age, so it's best to purchase at a young age. Life insurance is important if you have just purchased a home and need to cover the mortgage, if you've recently had a baby or have plans to in the future, or if you would like to provide income replacement to your family in the event of an untimely death.