family holding hands on the beach

What is a Life Insurance Policy & How Much Do I Need?

A life insurance policy is an agreement between an individual and an insurer where the insured will pay for coverage, and in the return, the insurer promises to pay an amount of money to beneficiaries if the individual is to pass away.

Life insurance is important to protect your loved ones and make sure they are able to maintain the same quality of life after your passing.

There are several primary types of coverage, and based on your standing, you may need additional or less protection.

This article covers those topics, along with information on how to get coverage, choosing your beneficiary, employer-provided plans and reviewing your policy.

Continue reading to learn more.

Life insurance policy basics

In layman’s terms, life insurance takes care of your family in the event of your passing.

There are many types of life insurance policies, which we will go into more detail on. For now, here are a few basics of life insurance you should understand.

The application

When you apply for life insurance, the insurance agency will ask you questions to determine the price of a policy and whether they can insure you.

One of the first things they will ask you is a rundown of your full medical history, in addition to that of your family.

The most important factor that will affect your premiums are any pre-existing conditions, such as heart trouble or high blood pressure.

Your family medical history will also affect your premiums, for example, a history of cancer.

The life insurance provider will also ask about your lifestyle, and whether you take part in hobbies they consider dangerous.

They also will ask if you smoke.

Types of life insurance

Here are the most common forms of life insurance:

  • Term life insurance: Term life insurance is the most common life insurance policy people buy. It’s for a predetermined term, for example, 10, 20 or 30 years. Once the agreed-upon term ends, you will need to buy new life insurance. Since you will be older, your premium will be higher than your original premium.
  • Whole life insurance: Whole life has a savings and basic life insurance component. Whole life insurance acts as an investment vehicle. Policies are valid for your whole life, not just for a set time period as with term. Premiums are fixed for your entire life, so you will not pay more when you are older. Many insurance companies offer you the option to convert to whole life during a term policy.
  • Hybrid plans: Policies are available that combine aspects of both term and whole life insurance. For example, universal life will let the policyholder move funds between the insurance and savings parts of a policy and variable life, which allows the policyholder to have control over where their savings are invested. These kinds of plans can get complicated, so it’s best to discuss the options with your agent.

Filing a claim

In the event of death, a surviving family member will fill out an official claim, which will need to include the death certificate that states the cause of death, the date, and the location.

Once the claim is approved, they pay it out in a lump sum to the person listed as the beneficiary.

Policyholders should know claims can be denied.

For example, if the insurance company finds out that the insured lied about a pre-existing medical condition or a dangerous hobby, the claim may be denied.

Most policies also don’t cover suicide.

Speaking with an agent

The variations of life insurance policies can be confusing.

It’s recommended you speak with a broker who has tools and the experience to evaluate your needs and explain your alternatives in language that makes sense.

Now that you understand the basics, you need to determine how much life insurance coverage you need.

How much life insurance coverage do you need?

Determining whether you need life insurance coverage is just the first step. Once you know you need a policy, you need to decide how much coverage you require.

Many people believe that coverage is based on yearly income alone, but it’s worth considering all the factors below when deciding.

Your debt

In the event of death, your debt can be passed on to your spouse, children and parents, as well as anyone who cosigned a loan or holds a joint account with you.

Protect these people by making certain that your life insurance policy covers the amount of debt you have.

Monthly household spending

Rather than taking out a policy based on what you earn, consider what your household spends each month.

If you save a significant percentage of your income and are looking to ensure that your family can get by month to month in the event of your death, monthly household spending may be a better basis for your policy.

Years until retirement

Life insurance is intended to ensure that your family can survive in your absence.

If you and your partner are young, you may assume that your partner will still work and will be able to provide for themselves.

However, if you are at or near retirement age, your partner could struggle to find work if needed.

Special needs dependents

If you are supporting those who cannot live independently, you need to take into account what it will cost to sustain them over a lifetime.

This can significantly increase the amount of coverage you need, requiring multiple or specialized policies.

Projected inflation

Finally, consider projected inflation over the term of your life insurance policy.

This is impossible to predict over a lifetime, but you can get a rough estimate for a term-life policy.

Just keep in mind that, when taking out coverage, $500,000 dollars now will have a different value in 10 years.

Determining the beneficiary of your life insurance

Life insurance is usually purchased to benefit specific people – often a spouse, child, partner or parent.

If you are looking to care for more than one person, it’s difficult to decide who should be listed as the beneficiary of the policy.

Here are some tips on choosing a beneficiary for your life insurance policy:

List those you want to help

The people you want to benefit from a payout on your life insurance may not necessarily be family members.

The beneficiary does not have to be a single person, or anybody at all.

You can leave the funds to your trust, estate or a charity.

If you wish to leave the payout on your policy to multiple people, a trust may be the best choice.

Money can have negative implications too

Sometimes, receiving a life insurance payout can have negative implications.

For example, if you name a beneficiary who is in deferment on student loans or who collects disability, they could be forced to come out of deferment or could lose some of their disability benefits.

If the payout is high enough, this may not matter, but you should consult with the individual before naming them in your policy.

Expect the unexpected

Of course, you expect your beneficiaries to outlive you, but there is no guarantee of this.

To help guard against legal troubles, it’s a good idea to select a secondary beneficiary.

Coordinate with your will

It is advisable for everyone to have a will.

Your will should name the beneficiary of your life insurance policy.

Avoid a contested will by making certain that any time you update the beneficiary of your life insurance, you do the same in your will.

If you want extra guidance on how to determine who should be the beneficiary of your life insurance policy, speak to your lawyer and/or an experienced insurance broker.

Is your employer-provided life insurance sufficient?

Many companies offer their employees life insurance.

The employer may cover these policies in full and usually, give you to option to purchase additional coverage with no medical exam.

Many people opt to rely strictly on these employer-provided policies.

In this post, we’ll explore the factors that determine whether this coverage is enough.

Coverage to match your lifestyle

If you are single and with little debt, your employer-provided policy may be sufficient as you may only need to consider burial expenses.

However, for those with debt, especially cosigned loans, employer-provided life insurance policies may not provide enough coverage to pay off the debt and cover necessary expenses.

Those who are married and/or have children will want a coverage level high enough to cover burial, debt and your yearly salary for several years.

In most cases, it is recommended to cover at least four years of your salary.

Also consider income beyond your salary, such as bonuses and commissions, that you may want to replace with insurance payouts.

If a member of your household has special needs, you will want to increase the coverage level even further.

The more you need to cover, the less likely it is that your employer-provided life insurance policy will be enough.

Gaps between jobs

Whether you leave your job at your own volition or are let go, your life insurance coverage will likely end.

Even if you head directly to a new employer that also offers coverage, it will take some time for the policy to come into effect, leaving you and your family temporarily unprotected.

Health issues

If your health leads to you leaving your job, you will lose that life insurance coverage and find it more challenging to secure another policy.

Spousal coverage

Many employer-provided policies give you the option to add limited coverage for your spouse.

Once again, you need to take into account existing debt as well as children and dependents when calculating how much coverage you will need.

If there are loans and credit cards to be paid off and it will necessary to hire help at home, employer-coverage may fall short of your needs.

The takeaway

In most cases, additional life insurance coverage will be required to cover necessary expenses in the event of your death.

As employment becomes more fluid and unpredictable, it is nearly always advisable to take out an independent policy even if you are happy with the coverage and cost of your employer-provided policy.

When to review your life insurance policy

There are several changes in your life that might impact your life insurance coverage and rates. Here are a few:

Changes to your family

When your family changes, so do your life insurance needs.

If you have a baby, you may want to increase your policy to help pay for their college expenses, larger monthly expenses, and other basic needs.

Whole life insurance policies can build cash value that can be used as a savings program for your little one.

The cash value of the policy can get them a new car when they turn 16, offer them money for their honeymoon when they get married, or provide them with coverage to protect the families they built.

When coverage is purchased at such an early age, the policy premiums will be low and that means that your loved ones can keep the policy for their whole life at a low rate.

Changes at work

Another time that your life insurance policy should be reviewed is when you get a promotion at your job.

Usually, when you get a promotion at work, you spend more money and therefore, this can increase your debt and final expenses.

You want your life insurance to match your new needs so that your debt can be settled, your house paid off, etc.

If you are promoted to a partner in your firm, you will want to add to your coverage as well.

This is so that your family, spouse, child or loved one can buy out your part of the business.

Term life insurance policies work well for this coverage because the premiums are low and the benefits are high.


Many people take advantage of an annual review.

There are so many changes every year in life and in the insurance industry in general.

By reviewing your policy with your life insurance agent each year, you will take advantage of new policy developments that may suit your needs more completely.

Your life insurance coverage should not remain stagnant.

Stay on top of your coverage so it is exactly what you and your family needs.

Now you know everything there is to know about life insurance.

The professionals at John B. Wright have the tools and the experience to evaluate your needs and explain your options.

Contact us to learn more about taking out a life insurance policy custom to your unique needs.

Privacy Preference Center