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How Much Term?

How much term life insurance is enough?

Usually, the first question that arises when quoting term life insurance is just how much is adequate.   Let's take a look at some key ways to approach this question before you start comparing plans.

First, a quick look at how term life insurance is priced.  It's important to understand that this half of the equation (the other being length..or term of coverage) is affected by a few key criteria.

Age of purchase for term life

Obviously, you want to get as much coverage as possible for a desired price.  The age at which you get term life insurance directly affects this...and in a significant way.  Term life insurance is very different from health insurance in that the age you buy term is locked in.  The premium does not increase as you get older which is a huge incentive to buy the coverage earlier.  A quick look at the so-called "cost of waiting" index illustrates this really quickly.  Rather than wait till you can buy the correct amount, it makes sense to buy what you can now and supplement it later.  This way, you can lock in the lower age rate for as much coverage as possible and bring your average amount cost per dollar of coverage down.  There's a real danger in people saying "I'll wait till I can get more coverage" not realizing that on average, they will pay more than if they split up the two buys (not to mention that they do not have any coverage during that initial period of time). 

Break points for amounts of coverage

There are break points of coverage at which, the cost per dollar of coverage goes down.  For example, you may pay less (per dollar of coverage) for $250K of coverage than for $100K or even $200K.  $250K is a standard break point.  You can play around with the amounts in the quoting engine to see which amounts work best around your ideal level of needed coverage.   $500K, $1M, and $2M can also be break points depending on the carrier.

Greater amount versus greater term

Another question is should a person buy more term life coverage (in dollar value) or buy less for a longer period of time.  This is really a personal consideration depending on your situation but you want to keep in mind the trade-off mentioned above where additional coverage purchased later will be more expensive.   One theory of insurance is that it doesn't always make sense to cover 100% of a liability.   Health insurance reflects this with 20/80 splits etc.  Once you have determined your needed amount, perhaps it makes sense to cover 80-90% of this amount for a longer period of time if you cannot afford to address the 100% for the full desired term of life insurance

Now that we covered some key factors affecting cost and how much term life insurance, let's look at a basic model for establishing how much term life coverage is needed.  Probably the easiest and best approach is to figure out how much income will need to be replaced during a period of time critical time.  For example, let's say one member of a family earns $50K annually and you have two young children (age 2 and 4).  Ideally, you may want to protect the family by insurance for $50K x 20 years x inflation amount.  The 20 years times $50K is $1M right away so that's a baseline.  You have to take inflation into account over longer periods of time so you really should have more protection than this baseline over a 20 year period.  Luckily, term life insurance is pretty inexpensive, especially if purchased at a younger age.  You can use our Term Life Planner to quickly and easily run this calculation with inflation included.   

Outside of the replaced income strategy to estimated needed term life insurance coverage, the other main approach involves taking care of a fixed financial responsibility.  This could involve paying off a primary residence mortgage or buying out a business partner.  Essentially, look at your liabilities...the companies or people that you owe money to.  Add all this up and add a cushion.  This usually works well when missing income is not really the issue.  This approach essentially insures that loved ones will no longer have the ongoing financial burdens or liabilities.

A combination of replaced income and liabilities is a well-balanced approach when considering how much term life insurance is enough.  You can run your term life quote instantly to compare different amounts and price-points based on the information above. 



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