How Much Whole Life to Purchase

How Much Whole Life Insurance to Buy?

Death, like taxes, is unavoidable, but most people choose not to think about it. However, if you have loved ones who rely on your income, you must ensure that you have adequate financial resources in place, including life insurance. Life insurance will help cover funeral and burial costs, pay off unpaid debts, and make day-to-day living expenses less burdensome for those you leave behind. If you don’t have life insurance or if you do but aren’t sure if your policy is adequate, here’s how to assess your coverage needs.

Whole life insurance is a form of permanent life insurance that does not expire. Whole life insurance is real long-term security. It has the fundamental features of any life insurance policy. It does, however, have several additional features that make it really appealing, such as: 

  • Cash Value
  • Guaranteed Growth 
  • Permanent Death Benefit 
  • Guaranteed Premiums

Key Takeaways 

  • Your financial and family circumstances will decide whether you need life insurance and, if so, how much coverage you need. 
  • The younger and healthier you are, the lower your premiums would be, but older people will still get life insurance. 
  • It’s a good idea to have enough life insurance to cover your debts plus any interest, particularly if you have a mortgage or cosigned student loans with someone else. 
  • The payout on your policy should be high enough to replace your income plus a little extra to protect against the effects of inflation on buying power.

Life insurance is a contract, or agreement, under which an insurance provider offers to pay a fixed amount following the death of an insured party. The benefit amount is referred to as a death benefit and is only available as long as the premiums have been paid on time. Life insurance policies assure the policyholder with the knowledge that their loved ones will have peace of mind and financial security in the event of their death. 

There are two types of life insurance: whole life and term life. Whole life plans are a form of permanent life insurance, which ensures you’re protected for the rest of your life as long as you pay your premiums. Some permanent life insurance plans have an investment feature that helps you to accumulate cash value by investing the premiums you pay.

Term life insurance, on the other hand, protects you for a specific period of time. For example, depending on your age and how long you need coverage, you might buy a 20-year or 30-year policy. Some providers offer renewable policies, which allows the policyholder to extend their policy after it has expired. There are some that require a medical examination to renew, which others do not – depending on your policy’s conditions and riders. Term life insurance usually has lower premiums than permanent life insurance.

Friendly Reminder – Many life insurance plans require a medical test as part of the underwriting process, but you might be able to buy no-exam life insurance at a higher premium rate.

Who Requires Life Insurance?

Life insurance may be a beneficial financial option, but it is not suitable for everyone. You do not need life insurance if you are single, have no dependents, and have enough money to cover your debts as well as the costs associated with death (funeral, estate, attorney fees, and other expenses). The same is true if you have dependents and sufficient assets to care for them after your death.

However, if you are the primary provider for your dependents or have substantial debt that outweighs your savings, insurance will help ensure that your loved ones are well taken care of if you die. A life insurance policy can also make sense if you own a company or have cosigned debts, such as private student loans, that someone else may be held liable for if you die.

Keep in mind that life insurance does not cover every eventuality. A regular life insurance policy, for example, would not pay disability benefits or cover long-term nursing care expenses if you become disabled. However, at an extra premium, you can buy disability riders or long-term care insurance riders to cover certain types of situations.

Note – If you’re married, you and your partner can also need life insurance coverage, even if only one of you is solely responsible for your household income.

Longevity and Life Insurance

One of the most popular misconceptions perpetuated by life insurance brokers is that if you don’t sign up for a policy when you’re young, you’ve missed your opportunity. According to the industry, it is more difficult to receive life insurance plans as you grow older. Insurance firms profit from speculating about how long people will live.

It is true that insurance is less expensive when you are young. However, this does not imply that applying for a policy is any simpler. The simple truth is that insurance firms want higher premiums to cover the risks associated with older customers, but it is very unlikely for an insurance provider to refuse to cover someone who is willing to pay the premiums associated with their risk group. That being said, get insurance if and when you need it. Don’t get insurance because you’re afraid you won’t qualify later in life.

Is it a Good Idea to Invest in Life Insurance? 

If you have a policy that builds cash equity, you should think of life insurance as an investment. Cash-value plans are often promoted as a new way to save or prepare for retirement. These policies assist you in accumulating a pool of capital that earns interest. This interest accumulates because the insurance firm, like banks, invests the money for its own gain. In exchange, they pay you a percentage of your money’s value.

However, it is important to understand the potential rate of return. If you take money from the forced savings program and invest it in an index fund, for example, you could get a better return. A cash-value insurance policy can be advantageous for people who lack the discipline to invest on a regular basis. 

A disciplined investor, on the other hand, would be able to achieve higher returns by putting the money they will spend into market premiums. Remember, if you’re thinking of using a life insurance policy as an option, make sure the rate of return and risk profile of the underlying assets are in line with your financial objectives.

How Much Life Insurance Should I Buy? 

Choosing a life insurance policy entails deciding how much money the dependents would need. Choosing the face value—which is the amount the provider pays out if you die—depends on a number of variables. Because of this, the minimum amount of coverage you need will vary greatly from what anyone else needs. 

In general, you can calculate your long-term financial commitments and then deduct your assets to determine how much life insurance you need. The remainder is the amount that life insurance would be require to cover. Financial experts often suggest buying coverage equal to 10 to 15 times your annual salary, but your personal number might be higher or lower. Here are some of the most relevant factors to consider when deciding on a minimum amount of life insurance.


Life insurance can be used to repay outstanding debts such as student loans, auto loans, mortgages, credit cards, and personal loans. If you have some of these debts, the insurance should provide sufficient compensation to pay them off completely. So, if you have a $200,000 mortgage and a $4,000 auto loan, you’ll need at least $204,000 in coverage to cover your debts. But don’t lose sight of the interest. You should also take out a little more to cover any additional interest or costs.

Income Replacement

One of the most important aspects of life insurance is income replacement. If you are the sole provider for your dependents and earn $40,000 a year, for example, you would need a policy payout big enough to replace your income plus a little extra to protect against inflation.

To be on the safe side, presume that the policy’s lump sum payout is invested at 8%. To substitute your salary, you’ll need a $500,000 policy. This is not a hard and fast law, but bringing your yearly income back into the policy ($500,000 + $40,000 = $540,000 in this case) is a respectable inflation hedge. You can begin shopping for insurance policies once you’ve determined the appropriate face value. There are several online insurance estimators that will assist you in determining how much insurance you will need.

Insurance for Others

Other people in your life are obviously important to you, and you may wonder if you can insure them. As a general rule, only insure people whose death will result in a financial loss to you. Although the death of a child is emotionally devastating, it does not result in a financial loss because children are expensive to raise. The death of an income-earning partner, on the other hand, creates a condition in which both emotional and financial losses occur.

In that case, use his or her salary to complete the income replacement equation. This also applies to financial partners with whom you have a business partnership. Consider someone with whom you share responsibility for mortgage payments on a co-owned home, for example. You should think about purchasing a policy for that individual, as their death would have a significant effect on your financial situation.

Example of a Life Insurance Needs Assessment

According to most insurance providers, a fair rate for life insurance is six to ten times the average income. Another method for determining the amount of life insurance required is to add your annual earnings by the number of years before retirement. For example, if a 40-year-old man receives $20,000 per year, he would need $500,000 in life insurance (25 years x $20,000).

The standard-of-living formula calculates how much money survivors would need to sustain their standard of living if the insured group died. Take that figure and multiply it by 20. The thought process here is that survivors should remove 5% of the death benefit per year—the equivalent of the cost of living amount—while spending the death benefit principal and receiving 5% or better.

Keep the following tips in mind when you measure your coverage requirements: 

Rather than thinking of life insurance in isolation, view it as part of a broader financial strategy. This plan should prepare for potential expenditures, such as college costs, as well as the growth of your income or assets. 

Don’t cut corners. Experts advise purchasing slightly more coverage than you believe you would need rather than purchasing less. Remember that your income will most likely increase over time, as will your expenses. Although you can’t foresee how high any of these will grow, providing a buffer means that your spouse and children will continue to live their lives.

Discuss the numbers with your partner. How much money would your spouse believe the family would need to survive without you? Will your predictions make sense to them? For instance, does your family need to replace your entire income or only a portion of it? 

Consider purchasing several, smaller life insurance plans rather than one larger policy to vary your coverage as your needs change. This will lower overall costs while also providing good coverage at all times. Compare life insurance quotes to get an idea of how much it would cost you.

Experts advise parents of small children to select 30-year terms over 20-year terms to allow them enough time to accumulate assets. A longer term means you’re less likely to be caught off guard and have to shop for coverage again when you’re older and premiums are higher.

In Summary 

You can’t know exactly how much life insurance you should buy. Remember your current financial position and imagine what your loved ones will need in the coming years to make an accurate prediction. 

If you require life insurance, you must first determine how much and what kind you require. While most people will get away with renewable term insurance, you should understand your particular situation. If you plan to purchase insurance through a provider, decide about what you’ll need ahead of time to avoid being trapped with insufficient coverage or paying for coverage you don’t need. As with investing, educating yourself is critical to making the best decision. So do your homework to ensure you get the best life insurance possible.

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