Ask a CFP® Professional
Aaron Brachman, CFP®
Senior Financial Associate,
The Washington Wealth Group
RBC Wealth Management
Washington, DC

Question:

“How much life insurance do I need?  I got married last year and my husband and I just bought a home, so I’m wondering if we should increase our coverage because of that, and if so, by how much?  We’re both in our late 20s and working; he makes a lot more than I do but we need both of our incomes to support our lifestyle.”

- DC Saver Emily

Answer:

Emily,

As someone who focuses on helping young professionals, I am very familiar with the unique challenges that they face. There are a number of large life events that can potentially all occur in a short period of time. These include items such as:

• Starting a career
• Getting married
• Purchasing your first home
• Having children and starting a family
• Assisting parents or grandparents financially

Each of these events has an impact on what your current and future life insurance needs may be. When trying to determine your life insurance needs, you need to ask yourself the following question:

"Would there be anyone either now or in the future who would be negatively impacted (financially) if I were to pass away prematurely?"

If the answer is yes, then you need to think about obtaining life insurance to help protect against this event.

Once you have decided that you need life insurance, these are the questions you should be asking:

1. When do I need life insurance coverage?
2. How much insurance coverage do I need?
3. What type of coverage should I get?
4. How much should my coverage cost?

When do I need life insurance?
Young professionals should start thinking about life insurance when they purchase a home, 2-5 years before they start planning on having children or when they begin assisting older family members.

How much coverage do I need?
To figure out how much life insurance one needs as a young professional, ages 20-35, the easiest way to figure this out is to apply for a death benefit that is in the range of 10-20 times the salary that would be given up if you were to pass away.

So in this example if the household would lose $50,000 of income if you were to pass away, it is suggested that you apply for $500,000 to $1,000,000 of life insurance coverage. It is stated that the husband makes more in this situation, so assuming that $100,000 of income would be lost if he were to pass away, then he should likely apply for $1,000,000 to $2,000,000 of life insurance coverage.

Certain factors that may require you to take on additional life insurance coverage (either now or at a later date) besides the 10-20 times salary are things like:

1. planning on having more than 3 children, or
2. expecting one of your salaries to escalate significantly in the near future.

The reason this amount of coverage is suggested is because this money would provide a stream of income to replace the lost household income from the deceased spouse. It could also be used to pay outstanding debts. Over time, the fixed amount of income that the proceeds would earn would be eroded by inflation and the principal balance would hopefully last long enough to help the surviving spouse get back on their feet.

What type of coverage should I get?
Figuring out what type of coverage to get can be a daunting task. There are many different types of life insurance and each serves a different purpose. In the example above, the main purpose for the insurance is to protect the family. For this reason, they should stay away from life insurance that has investment features and focus more on cheaper coverage called "term insurance."

There are many different types of term insurance, for simplicity, we usually recommend to most young professionals that they focus on "level-premium term insurance". This means that the premium payments and death benefits do not change over time.

Level premium term insurance offers a fixed premium for a certain period of time. This period of time is usually 10, 15, 20 or 30 years. The length of coverage should match the needs of your family. This means that the coverage should last until your future children turn 18 and the mortgage on your home is likely to be paid off.

How much should my coverage cost?
If you match up the right time frame for your situation, and are a young professional who is in good health, who does not use tobacco, these policies typically cost around $1,000 for every $1,000,000 of coverage.

I would suggest that when you are shopping around for a policy that you go through an insurance agent who is able to shop around to many different insurance companies for the best possible rate. Many agents only work with one company and the first question you should ask your agent is how many insurance companies they work with.


In summary, in the example above, the answers to the 4 questions above are:

1. They should start to think about putting life insurance in place now.
2. They each need about 10-20 times the salary that would be given up if one of them were to pass away.
3. They should look at level-premium term insurance and match the term period with how long they will need the coverage.
4. It should likely cost them each around $1,000 for every $1,000,000 of insurance coverage they put in-force.

-CFP® Professional Aaron Brachman