This article will help you boil it all down to a few key things to focus on:
Life insurance is not a one-size-fits-all strategy. The life insurance that makes sense for a single person starting out is probably not the best choice for a senior couple in retirement — and what works for them won’t be ideal for a young family. As you go through life, your obligations, plans, and needs change, along with your budget. Life stage is one of the most important factors in determining when to buy life insurance.
Here are some suggestions for the types of policies to consider depending on the stage you’re at in your life:
- Young, single, and on a budget
Why do you even need life insurance if you don’t have a family or dependents? Just because you don’t have dependents doesn’t mean you don’t have other important obligations and considerations.
- If your parents or relatives supported you by cosigning for student loans, a car, or credit cards, those debts could fall on them.
- If you’re living with a partner — and sharing the bills — you probably don’t want to encumber that person with higher financial obligations and rent payments while they’re grieving your loss.
- Funerals can be costly — someone will have to pay between $7,000 and $10,000 for final expenses.
Consider a term life policy. We’ll explain more about the different kinds of policies below, but term life can be an affordable option for healthy young adults. You may find that just a few dollars a month can buy enough coverage to settle all your debts and leave something for your loved ones.
- Starting a family
When you have a spouse and young children — or even if you’re just thinking about starting a family — the need for life insurance is clear: If something were to happen, you want to feel confident that they’ll be taken care of financially, especially while the kids are still at home. That typically means:
- Paying off the mortgage
- Replacing the income you won’t be bringing in
- Saving something for the kids’ college
You may also want to start saving for the future. The good thing is, you’re probably still relatively young, which can make life insurance more affordable.
Consider a whole life or term life policy. We’ll explain more later, but whole life insurance is a permanent policy that covers you for the duration of your whole life and can give you the flexibility to save money and adjust to changing circumstances as life evolves.1
If you’re looking for a more inexpensive policy option, consider term life. At this life stage, you’re typically young enough to get good rates.
Lastly, some people buy both! A term policy for its price and a whole life policy for its duration of coverage and many other benefits.
- Middle age
As you get older, your life changes. You might be married with kids or divorced with a dog. Maybe your peak earning years are past, and your career is winding down — or you could be about to come into an inheritance.
Depending on your specific situation, your needs could vary considerably from those in your social circle — even if they’re all about the same age. You need to think about what you need from a life insurance policy:
- Do you have a mortgage that needs to be paid off?
- Will your spouse be able to get by on their own income, or does your income need to be replaced?
- Do you still need to help ensure that your spouse has enough to live on in retirement?
- Are you still worried about paying for college?
Compare term and whole life policies. Depending on your needs, either could be the right choice: In addition to a death benefit, whole life policies provide a cash value benefit and offer more flexibility than term policies, and the premiums tend to stay the same for life. However, if you only need coverage for a limited number of years, a term life policy is typically a less-expensive choice, albeit with fewer benefits.
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If you have a family, you probably want to leave them enough to cover all the extra costs they’ll face in your absence, especially while your children are still at home. And it’s clear that the more dependents you have — and the younger they are — the more life insurance you need. So how much insurance should you have?
There are a few general rules for determining your life insurance need:
- Consider 10 times your salary: This is one of the simplest rules of thumb, and it can provide a useful cushion for your family, but it doesn’t take all your actual expenses and needs into account.
- Consider 10 times your salary, plus college expenses: If you add $100,000 - $150,000 for each child, that may help in realizing more opportunities you want for them.
- Consider the DIME formula: DIME stands for Debt, Income, Mortgage, and Education. Total your debts, mortgage, and college expenses, plus your salary for the number of years your family needs protection (e.g., until the children are out of the house), and that’s your coverage need.
- Human Life Value
Some financial representatives calculate the amount you need using the Human Life Value philosophy, which is your lifetime income potential: what you’re earning now, and what you expect to earn in the future.2
In its simplest form, the philosophy suggests that you multiply your income by a variable based on factors such as age, occupation, projected working years, and current benefits.
As with every individual, the amount of recommended insurance you purchase depends on many factors. A simple way to get that number, however, is to multiply your salary times 30 if you are between the ages of 18 and 40. The calculation changes based on your age group, so please refer to the chart:
30 times income
20 times income
15 times income
10 times income
1 times net worth
1/2 times net worth
Any of those methods are a good start, but it also makes sense to talk with an experienced professional — like a Guardian financial representative — who will learn your specific situation and can guide you through the process of calculating your personal amount.
Generally speaking, term life policies are simpler: You pay a specific premium for a defined term (say 10 years). If you die during that time, a death benefit is paid to your beneficiaries — but when the term is over you must get new coverage or go without. For a given level of coverage, term life can be more affordable than whole life, because there’s no cash value component — and it’s not permanent. If you’re considering a term policy, here are a few things to look for:
- Can you get the term you want?
- Is it convertible to a whole life policy later?
- Is it affordable?
- Does it have the features you want? And can you save by bundling the policy with other coverage plans?
- Can you get the coverage you need through your employer?
Whole life policies are (again, generally speaking) designed to provide a death benefit for your entire life. They also have a cash value component that provides a number of benefits: A portion of your premiums are invested, and over time this builds a “cash value” to your policy that you can use later to pay for premiums (for example, when you retire) or for any other purpose like supplementing a college education or helping with a down payment on a house.3 Or, you can “surrender” (sell back) the policy for money to live on after your beneficiaries no longer need the coverage.
There are other benefits as well. Whole life policies tend to offer more optional features, called riders, that can add worthwhile benefits for an added premium. 4 For instance, you can add a rider that pays the death benefit early if you become chronically ill.
If you’re considering a whole life policy (or another type of permanent coverage called universal life) here are three key things to look for:
- Is the company financially strong?
- Does it offer the features and riders you need?
- Do you understand how the policy works?
This last part is important because whole and universal life policies have a lot of variations and clauses that can seem quite complex. Before you buy a whole life policy, make sure to talk to someone who’ll go through all the features and options and take the time to make sure you understand what you’re buying — which you can do by speaking with a Guardian financial representative.
You’ve probably heard of a lot of different insurance companies, and they may all seem the same. They’re not. Here are the important things to look for as you compare insurers:
- Financial strength:5 First and foremost, you want to be as sure as you possibly can that the company will be around when your family needs a payout years or decades down the road. The best way to do that is to look for companies with strong financial strength ratings. That includes a rating of at least “Superior” (A+) from A.M. Best, a “Very Strong” (AA-) from Standard & Poor’s, or an “Excellent” (Aa1) from Moody’s.
- A company that underwrites its own policies: Some companies act as middlemen who sell policies from another insurer, and this can add costs to your premiums. Just as concerning, it can add an extra layer if you want to change your policy — or down the road when your family needs a payout.
- Convertible policies: A term policy may well be the best choice when you buy your policy, but things can change. So look for an insurer that offers the option to convert from term to a whole life policy without taking another medical exam, which may increase the cost of coverage.
- Guaranteed term renewability: If you become critically ill near the end of your policy’s term, you’ll want to be able to renew without taking another medical exam. Some companies offer this on a year-to-year basis — and while you can expect your rates to rise substantially, it may be worth it for your survivors.
Another way to compare insurance companies is by looking at online customer reviews. While these aren’t likely to tell you much about a company’s financial stability, it can tell you how easy they are to work with, and whether claims servicing is a problem.
Lastly: How do you find out more about your life insurance options?
The best thing to do is connect with a financial representative who will listen to your needs, tell you about the best ways to meet those needs within your budget, then help you decide. Consider starting right now. After all, life insurance tends to get more expensive the longer you wait to buy it.
If you are an employee, taking advantage of your benefits at work can be an affordable way to get the financial protection you want for yourself and your family. Contact your HR department to review your benefit details and determine how much life insurance is available to you. Your employer may provide life insurance as a benefit, or you may opt to pay for additional life insurance through payroll deductions.
Learn more about how to buy life insurance.
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Frequently asked questions about getting the best life insurance
What’s the best way to compare policies?
First, compare the two basic types of policies — term and whole life — to decide what’s best for your needs. Then, compare the quotes, benefits and features of different policies from companies with strong financial strength ratings. Since there are a lot of variables to consider, it makes sense to speak with an insurance professional who can help you decide.
How long do I need life insurance?
A life insurance policy can be a life-long tool for protecting and building your family’s finances. However, at a minimum, you should consider having a life insurance policy that lasts for as many years as you expect to have children at home or other dependents, such as a spouse.
Can I find online ratings for life insurance companies?
You can and should look up a company’s financial strength ratings at AM Best, Standard & Poor’s or Moody’s. For customer service reviews, check with a source you already trust for online reviews and see if they review life insurance companies.
Have questions? Here are resources to help you learn and compare.