When clients ask me what kind of life insurance they need, I tell them that there are really three steps in the process of figuring out what kind of life insurance to buy which will determine what kind of life insurance quotes to get:
You need to figure out exactly, or close to it, how much capital you or your spouse would need to pay off debts and invest to replace lost income of a spouse. In my practice in Palo Alto, CA this rarely equates to a generic 10x earnings or other rule-of-thumb. There are many variables to consider. Do you pay off a low interest rate mortgage, or do you invest enough capital to generate monthly income to continue paying the mortgage. Mortgage interest deductions on a tax return can help families maintain their miscellaneous itemized deductions, since mortgage interest is one of the largest itemized deductions families can use. If you lose that deduction it’s possible that you would lose the rest of your deductions to the floor imposed by the IRS and those deductions might be wasted. Remember, you need a largest enough block of capital to replace your earnings if something bad happens to you. You can use the help of a fee only financial planner, or you can use the help of a local life insurance broker with a lot of experience. I’m in Palo Alto, CA and I’m in my 30th year so I have plenty of experience helping families develop the “right” number for their unique situations.
Once you’ve figured out how much life insurance you need, you need to figure out HOW LONG you want the policy to remain active. Do you have young kids? Well, perhaps you’d want protection until they graduate from college. That would be, perhaps, 15 years. Do you need insurance to protect a business loan or provide key person insurance or to fund a business continuity plan? Then maybe a 10 year duration makes sense. If you’re conservative and want insurance on the books until the day you die, whether it’s tomorrow or 50 years hence, then “permanent” insurance would be something to consider.
Ok, so now that you’ve answered the first two questions, you’re ready to decide on what type of life insurance is best for your situation. In my practice, the “sweet spot” seems to be 20 years. This duration of level premium term life insurance policy makes a lot of sense for families with young kids who need to protect them until they complete undergraduate studies or at least stabilize financially outside their primary home.
There are many flavors of life insurance these days. No one policy will solve all your needs, but you have many options to choose from.