02 Dec How much life insurance do I need?

 Q. I’m married and we have two kids. We each have $250,000 term insurance policies. This would cover the cost of our mortgage if one of us died, but that’s about it. How can we figure out how much more insurance we need? And is term the way to go?

A. Life Insurance is one of the most important protection components in terms of financial planning.

Anyone with unemancipated children should have life insurance, said Anthony Vignier, a certified financial planner with Vignier Investment Group in Kearny.

“When thinking about how much life insurance you need, you should make an accounting of all your current and potential debt,” Vignier said. “This should include things such as medical bills, mortgage balances, car loans outstanding college loans, funeral costs and potential college costs for your children.”

You should then buy a policy that has enough coverage to meet your debt.

But debt isn’t the only consideration.

You need to think about how much income would be lost if the insured died, and how you can use insurance to replace that income.

“For example, if a person earns $50,000 per year and you assume that you can invest your money and get a 5 percent return, you would need at least a $1 million life insurance policy so that on the passing of that individual, the money from the policy can be invested to generate the lost income,” Vignier said.

Even an individual who is a stay-at-home parent with no income should have life insurance, he said. It’s tough to put a price tag on that person’s contribution to the family household. You’d need to determine the annual cost to hire other people to do all the work that person performs for the household, and then get enough coverage to pay for those services for a certain period of time, Vignier said.

Consider trying some of the online calculators that take into account your assets, your debt and your income. These can be a very helpful starting point to determine how much coverage you need. And remember — no one ever complained they had too much insurance coverage when a person died. They only complain that there was not enough.

When it comes to deciding what type of insurance to use, you should really take a look at your overall finances.

Term insurance, which is less expensive than permanent policies, is a popular option.

“It is an efficient way to protect your survivors against a low probability event,” said James Marchesi, a certified financial planner with Mill Ridge Wealth Management in Chester. “The issue being that when you are healthy and happy at the onset of retirement, all those term policy premiums are worthless once the term is up — unless you have term coverage with a conversion option, yet that can be a big expense to maintain once converted.”

Permanent insurance may provide protection your entire life, and it also accumulates a cash value, which the owner can use or borrow against, Marchesi said. But premiums on a permanent insurance policy are typically much higher because of the investment component.

“Permanent policy design has evolved over the last couple decades, to where it makes sense to consider a whole life policy, universal life, index-universal life, variable life, variable universal life or a hybrid/blended policy,” he said.

But if cash flow is an issue, it’s more important to get the appropriate amount of coverage through term insurance than to pay a higher premium to get permanent insurance, Marchesi said.

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This story was first posted in December 2014.