How Much Money Does Life Insurance Cost?

Life insurance is important, but how much life insurance should you purchase? How much money does life insurance cost? And how can you fit the monthly premiums into your current budget?

These are important questions. Life insurance is an important tool, and it can be relatively inexpensive, but the cost of life insurance can quickly change depending on certain factors.

Life insurance is important when you have people who are dependent on your income. Young families in particular have a high need for life insurance, but at the same time, young families also have a lot of demands on their cash flow.

Purchasing affordable life insurance is an important part of a financial plan and the cost of life insurance needs to fit into monthly spending without causing a lot of stress.

In this post we’ll explore some life insurance costs for a family in their 30’s with a young child. We’ll see how life insurance costs can vary depending on certain factors. We’ll also see how much life insurance costs in a real life situation.

Why Purchase Life Insurance?

Our ability to earn an income is arguably our largest asset. It’s usually worth more than a house, a car, or anything else we might own.

Losing the ability to earn an income is a BIG risk for most families.

This risk is largest when you have people who are dependent on your income. If you were to pass away unexpectedly this would cause a major financial set back for your dependents.

Typically when we think of dependents we think of small children or a lower income spouse or partner. But dependents could also be aging parents, dependent siblings, extended family, or even friends etc.

Life insurance is meant to protect your dependents from the loss of your income for a period of time. This period depends on your personal circumstances. Children may no longer be dependent once they’re adults and living on their own. Spouses/partners may no longer be dependent once they’ve reached retirement age. Plus your earning potential will decrease over time, especially as you get closer to your target retirement age. These factors, as well as other factors, can influence how much life insurance you need and how long you need it for.

When deciding if you need life insurance, how much life insurance you need, and how long you need it for, it’s important to determine what risks you’re trying to minimize because these can change and get smaller over time.

Read more about when you might need life insurance…

Types Of Life Insurance

Once you’ve determined why you need life insurance coverage, how long you need it for, and roughly how much you need, the next step is to decide what type of life insurance fits best.

Here is a quick summary of the different types of coverage…

Click here for a more detailed summary…

Term Life Insurance: Term life insurance pays if the insured individual dies during the term. Term life insurance is usually 10 or 20 year terms, but you can get other terms as well. If you pass away unexpectedly during the term then your beneficiary will receive the death benefit. Term life insurance is usually the least expensive to purchase because it only covers a specific period of time.

Permanent Life Insurance: Permanent life insurance is meant to last for your whole life. It’s meant to cover a different kind of risk than term life insurance, it’s meant to cover a risk that doesn’t go away or doesn’t decrease in the future. There are different types of permanent life insurance like whole life insurance, universal life insurance, term-to-100 insurance etc etc. Because it lasts much longer than term insurance, and because the chance of payout is much higher, permanent life insurance is more expensive.

Mortgage Insurance: Mortgage insurance isn’t really life insurance per se, but we’ve included it in this list because it’s a pretty common type of insurance and often pays when there is an unexpected death. Mortgage insurance isn’t a great form of life insurance and it’s typically less expensive to purchase a term life insurance policy instead. If you have a mortgage, check if you are paying for mortgage insurance premiums, then investigate if another option like term life insurance could cost less.

This list is not exhaustive, there are many different types of life insurance and they can all provide value in specific circumstances, but if cost is a consideration then for the average family one of the most effective forms of life insurance coverage is term life insurance.

How Much Does Life Insurance Cost?

To understand how much life insurance costs lets explore a real life example from a recent client. This couple is in their early 30’s with a new family. They had a small amount of life insurance coverage, which was meant to cover their mortgage if the unfortunate were to happen, but with a young family and dependents they needed additional coverage.

Their situation highlights a few key considerations when determining how much life insurance costs. These are actual quotes for life insurance.

First Consideration: Buying life insurance in $250,000 increments can cost less.
The couple in our example was quoted $356/year for a $450,000 term life insurance policy but only $280/year for a $500,000 term life insurance policy. In both cases the term was 20-years but the $500,000 policy, despite having a higher death benefit, was actually less expensive.

Second Consideration: Buying life insurance in shorter terms will cost less.
The couple in our example was quoted $548/year for a $750,000 20-year term life insurance policy and $915/year for a $750,000 30-year term life insurance policy. Adding an additional 10-years to the term increased the cost by 67% per year and would extend payments for an additional 10-years.

Third Consideration: The incremental cost of the next $250,000 of life insurance is typically lower than the previous $250,000.
The couple in our example currently was paying $282/year for a $300,000 20-year term life insurance policy but was quoted just $548/year for a new $750,000 20-year term life insurance policy. The death benefit increased by 2.5x but the cost only went up 1.94x (plus they got a longer coverage with a new T20 policy).

All that being said, when purchasing life insurance it’s important to remember that even “cheap” life insurance isn’t worth it when there is no specific need for coverage. So even though the next $250,000 in coverage might be cheaper dollar for dollar, if there is no specific need then it doesn’t really matter how much it costs as it isn’t providing much value. So even though that extra $250,000 in life insurance coverage may seem cheap on a $/month basis, if it doesn’t address a specific need then that money is wasted every month.

What Impacts Life Insurance Rates?

The above examples are just for illustrative purposes. Your life insurance rates might be higher or lower depending on a number of factors. There are many different factors that impact life insurance rates.

For example your cost of life insurance could be higher or lower due to…

Amount of Coverage: More coverage is more expensive
Age: Purchasing life insurance later in life is more expensive
Sex: Statistically men have shorter lives and pay higher premiums
Health: A medical exam may be required to receive coverage and certain health factors may lead to higher premiums
Smoking Status: Statistically your smoking status has a large impact on longevity and smokers will pay higher premiums
Type of Employment: Statistically your type of employment also has an impact on longevity and certain occupations will pay higher premiums

Purchasing Affordable Life Insurance

Purchasing life insurance is important in many situations, but it’s also important that it’s affordable and fits into your monthly budget. Term life insurance is one of the most affordable life insurance options available. The cost of term life insurance it’s typically very reasonable (even downright cheap when purchased while you’re in your 20’s, 30’s, or 40’s) and the payments only last for the specific term like 10 or 20 years.

Young families in particular have a high need for life insurance coverage but they also have a lot of demands on their cash flow. Purchasing affordable life insurance is an important part of their overall financial plan and the cost of life insurance needs to fit into their monthly cash flow.

As you review your life insurance options consider how much it costs and how that fits into your monthly spending. Being properly protected can provide a significant amount of peace of mind but it can also add $30 to $100+ to your monthly expenses. This may require reprioritizing other spending to make room for this new expense, but it’s a small price to pay for having the right amount of coverage.

Disclaimer: This post is for educational purposes only, please speak with an independent insurance broker about your insurance needs and the cost of coverage.