Many employers offer life insurance as an employee benefit. If there’s little-or-no cost to you, there’s really no reason not to take the coverage. You’ll still want a separate policy you can control, however. The policies offered by employers are annually renewable group term life policies. In most cases, the coverage amount is equal to a year (or two) of earnings – at most. Typically, this isn’t enough coverage for most households. Additionally, if you leave your job or get caught up in a round of unexpected layoffs, your group term life insurance policy usually doesn’t follow you, which means your coverage can suddenly disappear. Take the benefit if it’s free but buy your own policy as well to protect your family.
For most new families, term life insurance is the most affordable coverage solution and allows you to purchase a significantly higher amount of coverage than alternatives like whole life insurance. It isn’t uncommon for whole life premiums to be 9 to 10 times higher than term life insurance for the same dollar amount of coverage. That’s money you can put toward housing costs, credit balances, clothes and food for your growing family, or put into a college fund. Consider the time frames for mortgages and/or college for kids when choosing a coverage term.
If your new family requires that you buy a new house, as often happens, you’ll want to get a term life policy that can cover your financial obligations for the length of the mortgage. If you expect you’ll be able to pay off the mortgage early, you’ll also need to consider the cost of raising a new family for 18 to 22 years – or until your youngest is out on their own. Many times, a second or third child comes along years later, making a 30-year term an attractive length even if you anticipate paying off the mortgage early.
Term life insurance is often called “pure life insurance” because there aren’t many moving parts or complicated financial growth projections to puzzle out like you might find with other types of policies. Term life is intended to cover a fixed-length financial commitment and to provide income replacement if an income earner dies early.
Once you establish a term length, like the 30 years in the above example, you’ll need to choose a coverage amount. There are several rules of thumb for choosing an amount. One suggests that you multiply your income by 10 and buy that amount of coverage. Another variation uses the 10 times income rule and then adds $100,000 per child. Rules of thumb can be handy, but they’re largely arbitrary. Instead you may want to take a slightly more detailed approach.
To calculate your life insurance coverage needs in more detail, the DIME method considers Debt, Income, Mortgage, and Education.
Debt: Include auto loans, credit cards, student loans, etc.
Income: Multiply your income by the amount of years you’ll have dependents, usually about 18 years.
Mortgage: You’ll probably want the mortgage paid off so your family always has secure home.
Education: Your life insurance death benefit can provide for your children’s college expenses as well.
Add the numbers from above to get a starting figure. If you have significant savings, you can subtract the amount you already have saved, making it the DIME-S method instead.
Regardless of which method you choose, now you know some of the main considerations that can drive the term length and coverage amount considerations.
Now is the time to get insured. Life insurance becomes more expensive to buy with each passing year and health concerns can drive rates and eligibility later in life. Locking in your coverage now means never having to say you’re sorry later – at least not for not buying life insurance.