How Much Life Insurance Do You Need?

By Motley Fool Staff

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To put it simply, life insurance protects those who depend on your paycheck. If you die prematurely, life insurance provides your dependents with ongoing income to replace yours, until (or unless) they can live comfortably without it. It can also provide a timely emergency fund for medical, legal, and funeral costs, should family savings not be adequate to cover them. (After all, that golf-inspired Fairway to Heaven casket ain't cheap.)

Life insurance is not a good way to strike it rich for "pennies on the dollar." It's not the surest way to leave a life of luxury for future generations of your clan. In fact, even though some life insurance policies are combined with a savings plan (in "cash value" policies), the savings plan is essentially independent. The life insurance component of these cash value policies retains its fundamental purpose: income protection for your dependents after you join that great hokeypokey in the sky.

Given this simple definition of life insurance, it should be easy to decide whether you need it. Start by imagining yourself gone tomorrow. (We know, it's morbid, but bear with us.) What would the impact be? And could we have your CDs?

Could your family afford the funeral expenses? Have you left a complicated will, or perhaps no will at all? More importantly, what about your spouse, children, and other dependents? Are they counting on your paycheck in the years ahead to cover basic needs and/or future savings goals? If you are the primary caregiver to dependents, what will it cost to replace you with a paid provider, and for how long?

If you are single, or one-half of a two-income, no-dependents household, you probably won't need much life insurance, if any. With a little planning, you can establish a low-risk savings fund to cover funeral costs, and invest the money you would have paid for insurance premiums. You may also want to obtain coverage that will pay the estate taxes on a huge estate so heirs don't have to liquidate assets at unfavorable prices to pay them. If you are right now (or think you will be) a successful investor, then you may be a prime candidate for such life insurance. These issues can get complicated, and may be best left to a discussion with an estate planning attorney.

On the other end of the spectrum, if you are the sole breadwinner for a large family with little savings, you are likely to need substantial life insurance. After basic food and housing is covered, life insurance premiums are likely to be next in line in terms of priority, perhaps even ahead of auto loan and credit card payments, and certainly ahead of retirement savings (not to mention satin Elvis bed sheets and Beanie Undies).

This article has been updated by Dayana Yochim. The Fool has a disclosure policy.

The Life Insurance Legacy

Life: it’s unpredictable and ever changing. And when things get tough in life and we find ourselves faced with difficult circumstances, the love of family and friends; the healing balm of time and the right life insurance plan can help us carry on.

Planning & Preparing Now

Facing a loved one’s death is never easy. But when dealing with the emotional turmoil that follows, families are often left with unanswered financial questions—magnifying their loss to an even greater extent.

So “what if” a parent or spouse passes away suddenly? Would family members have the insurance they need to pay off the mortgage, relocate to a new job, pay private schooling expenses or simply go on with life? 

Answers to questions like these don’t come easily. But planning and preparing for the inevitable with life insurance is the best way to make sure family members can survive alone during a time of life transition. Besides, it’s the right thing to do.

Choosing the Right Life Insurance Policy

When it comes to choosing the right life insurance plan, some want just the basics: a way loved ones can pay final expenses, cover monthly bills and start life fresh. Others need policies that build cash reserves to help carry families forward during a difficult time—and the lifelong period that follows. 

Regardless of financial goals, there are several plan types of insurance available that can help prepare loved ones to lead productive lives alone. For example, the simplest and cheapest form of life insurance, a term life policy provides coverage during a specified length of time—and pays the family the policy’s value if he or she dies during that term. 

For lifetime insurance coverage that’s a bit more expensive but doesn’t risk rising premiums, whole life coverage may be the right thing. This type of plan builds cash value over time, providing financial security long term and offering protection for life.

Leaving an Inheritance of Love

No one likes settling loved ones’ affairs. But it’s easy to aid those who will be left behind by buying insurance ahead of time.

With the help of a knowledgeable insurance agent, making final arrangements; recording dreams and wishes, and setting aside resources to help loved ones carry on is simple. All it takes is a little time, family budgeting and communication.

With small, monthly payments; some basic insurance information and the guidance of a licensed expert, family members can have peace and security when it’s needed most—and a lifelong inheritance of love unlike any other.