Do I need life insurance? And if so, how much coverage do I need?
Those are basic financial questions that most people face. But relative to how common the questions are, there’s not as much trustworthy information and there’s perhaps more confusion.
What if you have a baby or young child? Do you need life insurance then? That's what a listener of the Clark Howard Podcast recently asked.
Do I Need Life Insurance If I’m Having a Baby?
We’re about to have a baby. Do we both need life insurance?
That's what a Clark listener wondered on the Feb. 7 podcast episode.
Asked Dylan in Illinois: "I am curious if my spouse and I both need a term life insurance policy. A little background: we are in our early 30s and just found out we're pregnant. We both work full-time and will continue working after the birth in September.
"We bought our first home last year and have around $700,000 of total debt (mortgage and auto loan) and around $1.5 million in total assets (retirement, investments, savings). Our combined annual income is around $400,000 (my wife's earnings make up about ¾ of that amount). We have all of our existing insurance through USAA (home, auto and an umbrella policy)."
Life insurance is designed to replace income in the event of an untimely death. Often it’s 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 that Dylan and his wife need life insurance.
What Type of Life Insurance Do I Need and Where Should I Buy It?
Buying life insurance can be stress-inducing or misleading, depending on how easily you trust the results of a Google search.
If it’s stress-inducing, you’re probably on the right track. There are all sorts of different life insurance policies. They’re generally filled with derivatives, riders and complex terms.
However, most people decide between term life insurance and whole life insurance. Clark is adamant that level term life insurance is better for almost everyone.
Clark recently shared his thoughts on how to buy term life insurance. One of the major steps is to filter potential life insurance companies. We've also put together a list of the best term life insurance companies.
However, Dylan noted that he and his wife already are embedded with USAA.
“It wouldn’t be a bad choice to just go to USAA and buy level-term insurance. Get 30-year policies. One on each of you,” Clark says.
“[Since you’re in your early 30s, a 30-year policy] would cover you for most of each of your remaining working lifetimes. And it would bring your soon-to-be-born child into adulthood. Over 30 years, you’d be able to have money to provide for [him or her].”
How Much Life Insurance Do I Need?
Many people, like Dylan, wonder whether they need life insurance. And if so, what type of policy should they get, and from what company?
The next obvious question: How much coverage do I need in my life insurance policy?
Life insurance is designed to replace your income. So, Clark says, look for 10 times your income.
Dylan is making roughly $100,000 and his wife is making in the neighborhood of $300,000 a year. By 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 that over the years,” Clark says. “So that’s why 10 is my number for 30-year level term.”
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 working, it’s important to consider life insurance.
Aim for a level term life insurance policy with benefits that are 10 times your income, Clark says. And the length of the term should coincide with the time you plan to retire — or a little bit before then.
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