How Much and What Kind of Life Insurance Is Best?

Dear Mary: My question is about life insurance. My wife believes that I need life insurance because I am the sole breadwinner in the family and we have a baby daughter.

I am not sure it is important right now, as we just bought our first house. Our financial situation is very tight, and we will be having a lot of minor improvements on the house to make it livable. I believe the situation of her mother being killed in a tragic car accident has made insurance more important to her now than it was before. What is your advice on having life insurance, and what kind is best? Thank you, and keep on being cheap! — Jim

Dear Jim: Here is my do-I-need-life-insurance test question: Who depends on your income for their livelihood and would be left financially destitute if your paychecks were to suddenly disappear?

If the answer is no one, save your money; you do not need life insurance. The only purpose for life insurance (except in rare cases when a wealthy person has exhausted all other estate-planning options) is to replace your income for those who would be left financially destitute if you were to die.

You say you are the “sole provider” and that you have a little daughter. That means there are at least two people who depend on your income. So, I agree with your wife. You need it. How much? Conventional wisdom says eight to 10 times your current annual gross income, when invested wisely, would provide your family with enough money to continue living at the level they are now.

Next, what kind of insurance? I recommend you get the cheapest term insurance policy you can find issued by an insurance company with an “A” rating or better. Term insurance is pure insurance — no fancy bells and whistles built into it. Term life insurance is currently very reasonable, and if you are young and healthy, it will be very affordable.

While you didn’t ask, let me suggest that you need to also purchase a term life insurance policy on your wife’s life. Even though she does not bring home a paycheck, you and your daughter would indeed be left in a precarious financial situation if she were to die. For you to continue working, you would need to pay for child care and, at the least, domestic help with housekeeping, food shopping and transportation. Her financial contribution to your family’s well-being is considerable!

Finally, I’ll throw this in: You also need disability insurance. According to LifeInsure.com, at age 42, it is four times more likely that you will become seriously disabled than that you will die during your working years. While life insurance insures your life, disability insurance insures your income.

I wish you and your wife well as you make these very important decisions. Providing for the future is one of the most important and loving things you can do for your family.