WEALTHY FAMILIES sometimes purchase life insurance to save on estate taxes. We discuss that in the chapter on giving. The chief reason to buy life insurance, however, is to provide for your family if you die prematurely.
With that goal in mind, think about who depends on you financially and how they would cope if you keeled over tomorrow. If you’re single and don’t support anybody, you probably don’t need life insurance. Similarly, if you’re married, the kids have left home, and you and your spouse are in good shape for retirement, you may not need coverage.
Instead, life insurance is crucial for those who have, say, young children, a stay-at-home spouse and few assets. How much coverage should you have? Experts sometimes advise buying enough insurance to cover your family’s entire costs until the kids are through college, which is potentially a huge amount—and the insurance premiums may be unaffordable. Alternatively, one rule of thumb suggests you need coverage equal to five-to-seven times your income. That’s more likely to fit within your family’s budget, but it doesn’t reflect your individual circumstances, including how old your children are, how much debt you have, the wealth you’ve accumulated and whether your spouse works.
What’s the right answer? You might try the Life Wizard insurance planning tool offered by TIAA.org. More than anything, it’s important to have at least some coverage. If you’re the main breadwinner and you die, your family will likely have to make big changes. You want them to have money to carry them through this transition period. If you don’t have much in savings, that might mean enough insurance to pay off the mortgage, fund college accounts and cover perhaps five years of living expenses. If you have very young children and your spouse stays home to look after them, you may also want insurance on your spouse’s life, because you would face added expenses if he or she died.
Once you decide how much life insurance to buy, next comes a big issue: Should you buy term or permanent life insurance?
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