How Much Life Insurance Should You Have as a 40-Year-Old?

How much life insurance does a 40-year-old need? That's a tougher question than you might think. It's important to make sure that your family is provided for in the event that something happens to you, and that any debts you have don't get passed to your loved ones. To help get you started, here's a quick discussion to help determine how much coverage you need and what type of life insurance is best for you.

A basic rule of thumb for life insurance

As we already said, the primary reasons a 40-year-old might need life insurance are to make sure loved ones are provided for in the event that anything happens to you, and to make sure other people don't inherit your debts. So, assuming you need life insurance based on these principles, we can start with a basic rule of thumb.

One popular strategy used is to simply base life insurance needs on your future earnings power. Most 40-year-olds are 20 to 30 years away from retirement, so you can simply multiply your income by this factor. In other words, if you have a salary of $80,000 and aim to retire in 25 years, multiplying these two numbers shows an ideal life insurance amount of $2 million.

Other important factors to consider

Of course, this is just a baseline number to get the conversation started. It doesn't consider any of your personal circumstances, so it might not be right for you. While it's impossible to list every potential "what-if" scenario, here are some of the important things you might want to consider.

• Does your spouse earn income? If you are the sole earner in the household, your insurance needs could be significantly higher than if your spouse earns a significant amount of the household income.
• How much money do you already have in retirement accounts, investments, and other places? As an example, if you have several million dollars in brokerage accounts, do you need as much life insurance as if you didn't have any significant savings?
• How many kids do you have and how old are they? If you're 40 years old and are the parent of three kids aged 5 and under, you might need more coverage than a 40-year-old who has one teenager who will be out of the house in a few years.
• How much debt do you have? The last thing you want if you die is for your loved ones to inherit a bunch of debt to deal with. A simple strategy is to figure out how much life insurance you'll need to make sure your loved ones' financial needs are met, and then add your outstanding debts (excluding your mortgage) to the total.

Term life or whole life?

The debate of whether you should get term life or whole life insurance is a bit too complex to thoroughly discuss in a short article. But here's the basic idea.

Term life insurance is the cheapest and most basic form of coverage. You'll get a policy with a certain term length (10, 20, and 30 years are common). If you die during the term, your beneficiaries receive the amount of money stated in the policy. If you don't, the policy expires and has no intrinsic value.

On the other hand, whole life insurance doesn't have a set expiration date. You make your monthly payments, and if something happens to you (at any point in your life), your heirs receive the stated death benefit. The caveat is that whole life premiums are usually far more expensive than term life; however, whole life policies build cash value as you go.

For most people, I'm a fan of term life insurance. This is what I have to protect my family. I got a 30-year term policy when I was in my early 30s, and this will cover my family if something happens to me before I'm 63 years old.

Here's my rationale. By the time I'm in my mid-60s, I'll have sufficient retirement assets and investments that if something happens to me, my wife won't need a payout from insurance. Plus, my kids will (hopefully) have been out of the house for some time by that point, with college paid for. And as someone who likes to invest, I'm fine simply taking the difference between the cost of a term and whole life policy and adding it to my brokerage accounts.

Having said all of that, here's the bottom line. Nothing in this article is intended to be personal financial advice. If you're concerned that you don't have enough life insurance or aren't sure which type of life insurance is right for you, set up a meeting with a Certified Financial Planner™ (not an insurance salesperson -- they sometimes use titles like "advisor"). They can point you in the right direction and make sure what you end up with is in your best interest.