Do I need life insurance? And if so, how much coverage do I need?
These are basic financial questions that most people face. But relative to the frequency of the questions, there isn’t as much reliable information and there may be more confusion.
What if you have a baby or toddler? Do you need life insurance then? That’s what a listener of the Clark Howard podcast asked recently.
Do I need life insurance if I have a baby?
We’re having a baby soon. Do we both need life insurance?
That’s what a Clark listener asked on the Feb. 7 episode of the podcast.
Dylan asked in Illinois, “I’m curious if my spouse and I both need term insurance. A little background: We’re in our early 30s and just found out we’re pregnant. We both work full time and will continue to work after the birth in September.
“We bought our first home last year and have approximately $700,000 in total debt (mortgage and car loans) and approximately $1.5 million in total assets (retirement, investments, savings). Our combined annual income is about $400,000 (my wife’s income is about ¾ of that amount). We have all of our existing insurance through USAA (home, auto, and umbrella).”
Life insurance is designed to replace income in the event of premature death. It is often much more important if there are family members – especially a child – depending on that person’s income.
In this case, with both parents working, Clark thinks Dylan and his wife need life insurance.
What kind of life insurance do I need and where should I buy it?
Purchasing life insurance can be stressful or misleading, depending on how easily one trusts the results of a Google search.
If it’s stressful, you’re probably on the right track. There are different types of life insurance. They are generally filled with derivations, tabs, and complex terms.
However, most people choose between term life insurance and endowment insurance. Clark firmly believes that term life insurance is better for almost everyone.
Clark recently shared his thoughts on getting term life insurance. One of the most important steps is to filter out potential life insurance companies. We have also compiled a list of the best term life insurance companies.
However, Dylan noted that he and his wife are already embedded in USAA.
“It wouldn’t be a bad choice to just go to the USAA and get some low-term insurance. Get 30 year policies. One for each of you,” says Clark.
“[Since you’re in your early 30s, a 30-year policy] would cover you for most of your remaining working life. And it would bring your soon-to-be born child into adulthood. Over 30 years you would be able to provide money [him or her].”
How Much Life Insurance Do I Need?
Many people, like Dylan, wonder if they need life insurance. And if so, what type of policy should they get and from which company?
The next obvious question: How much coverage do I need in my life insurance?
Life insurance is designed to replace your income. So, Clark says, look for ten times your income.
Dylan makes about $100,000 and his wife makes about $300,000 a year. Under Clark’s rule, that means Dylan should get a $1 million policy and his wife should get a $3 million policy.
“Remember, we have inflation that will erode the value of this over the years,” Clark says. “That’s why 10 is my number for a 30-year term.”
Final Thoughts
Life insurance is one of those building blocks of a healthy financial life.
Especially if you have a child or children and at least one parent is employed, it is important to consider life insurance.
Aim for term life insurance with benefits 10 times your earnings, Clark says. And the length of the tenure should coincide with when you plan to retire — or slightly before.
