I'm 26 and interested in getting a 30-year term life insurance policy, though I have no dependents (I'm engaged). Should I be looking to get the maximum coverage right now, or will a 30-year term policy allow me to increase my coverage down the road when I am married and have a family?
Hi brokeresident- that is a great question. First of all, buying when you are young is a great idea since you can lock in lower rates due to age and health. You're also protecting your future insurability- who knows what might happen with illnesses and sickness.
In terms of how much, there are a couple ways to determine how much you need. One way is a needs analysis, which analyzes your cash needs and income needs in the event of your premature death. This method looks at paying off final expenses, debts, mortgages, setting aside emergency funds, college funds, etc and providing income to continue coming into your family for X number of years to the rest of your life.
Another option is the concept of "full replacement" which basically has the idea that you protect your "human economic life value". The idea is that with home or auto insurance, you have full replacement value- in other words, you aren't replacing your stolen Mercedes with a new Honda (nothing against Hondas- I own one). So your human economic life value can be determined by how much income you will earn during your lifetime. As a very basic and raw example, if you are 26 and let's say by age 30 you are making $50,000 per year. If you work until age 65, and assuming no raises or inflation, etc (as I said, a basic example), your human economic life value would be $1.75 million. So your coverage need would be $1,750,000. This would just replace the income that you plan to bring in to your family during your lifetime.
BOTTOM LINE: Life insurance is really love insurance. It is meant to protect your loved ones in the event that something happen to you. It allows them in the worst possible time in their lives to, at least financially, have nothing to worry about. It allows them to maintain their lifestyle, stay in your house, stay in the same schools, keep the same friends, etc.
It is the only financial instrument that can create in one moment what it takes a lifetime to accumulate. And in that event, there is no better way to leverage your dollars. My personal opinion: buy as much as you can afford to make sure your family is protected.
The next question after that is to decide how long you need the coverage.
I hope this has been helpful. Please feel free to email me directly if I can help you with anything else on this topic.
Florida Guy