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Understanding Life Insurance: Where Do You Start?

Cypress Wealth Services

September 2022

Life is certainly unpredictable. The past few years have definitely highlighted that reality. However, if you start thinking about everything that could go wrong, you could create undue stress. That’s where life insurance can help. It may not solve all your worries, but it does help to protect your loved ones when you no longer can.

Life insurance options can be complicated, and there’s no one product for everyone. Many factors go into selecting the type of insurance you may need, and the amount of coverage you receive will depend on your unique situation. Here are a few questions to consider to help you evaluate your life insurance needs.

Do You Even Need It?

Not everyone needs life insurance. If you have enough money saved and invested so that your death would not create a financial hardship for your loved ones, a life insurance policy might be unnecessary. If you are a single young adult with no dependents, you may only need a small policy to cover the expenses of a funeral and burial—or more likely no coverage at all if you have at least some amount saved and invested to cover your final expenses. Take a good hard look at your financial situation and decide if life insurance is the right fit for you.

Two Options for Life Insurance

Before you start thinking about how much coverage to get, you’ll need to choose the kind of life insurance that is most appropriate for your situation. Here’s a breakdown of the two primary types of life insurance.

Term Insurance

Term insurance offers coverage for a specified length of time, which can be anywhere from 5 to 40 years or longer. The downside to term insurance is that it only covers you for your specified length of time, so if you pass away after the term is over, no death benefit is paid to your beneficiaries. But depending on your situation, you may only need insurance for a certain time period—for example, until your kids are grown or you have enough money saved to avoid financial hardship. One of the major benefits of term insurance, as opposed to permanent insurance, is that it is usually the least expensive out-of-pocket option. Since life insurance in most cases is meant to replace lost income or to pay debts or final expenses (and not to serve as an investment vehicle or income source, although life insurance is sometimes marketed and sold for those purposes), term insurance makes sense for most people in most situations.

Permanent Insurance

Permanent insurance is coverage that is not limited to a specific duration of time, meaning it can potentially last your entire life. There are several types of permanent insurance, including Universal Life, Indexed Universal Life, and Whole Life. The benefit of permanent insurance is that it can last longer than a term policy so that a death benefit will be paid to your beneficiary no matter when you die (assuming your policy has been funded properly). This type of insurance is typically much more expensive than term insurance, and for most people in most situations a permanent life insurance policy may not be necessary. Rather than paying additional premiums for a permanent policy, it often makes sense to just buy term and invest the difference in premiums.

How Much Do You Need?

Finally, the question at the forefront of your mind. Accurately calculating your life insurance needs requires the development of a financial plan that looks at your finances holistically. Without knowing where you’re going, how can you buy the right amount of life insurance to protect your loved ones in case life doesn’t go according to plan? Using a rule-of-thumb method to calculate your life insurance needs can be a helpful first step, but because everyone’s situation is unique, a rough calculation can only provide a rough output, at best. If you wish to get an initial idea of life insurance needs, the method below can serve as a starting point.

The DIME Method

Conduct a needs analysis by separating your finances into different areas. Couples should do their calculations separately.

  • Debt and final expenses
  • Income
  • Mortgage
  • Education costs for children

In addition to these areas, two of the biggest factors that affect how much insurance you need are your marital status and your financial dependents. The more people that depend on you, the more coverage you may need.

Multiply It

After calculating and totaling each of those dollar amounts, apply an income replacement multiplier to determine your needed coverage amount. The multiplier varies based on your age and the status of your home mortgage. For example, if you’re under 50 years old, you can likely use a multiplier of 20. Older couples may be able to use a multiplier of 10 or 15, depending on the number of years left on their mortgage.

Keep in mind that these are just guidelines designed to give you a general idea of the amount of insurance coverage you need. There may be adjustments for your particular situation and what makes the most sense for your family.

Put It All Together

You now have a sheet of paper with a lot of different numbers on it. Here’s how to put it all together.

  • Combine your annual income (multiplied by the multiplier), your mortgage balance, your debt load, estimated future financial needs, and death expenses.
  • Then subtract your liquid assets (think savings, life insurance policies you already hold, any college funds, etc.).
  • The number you end up with should give you a general idea of how much insurance you should buy.

Where Do You Go Next?

If you’re ready to explore your life insurance options, it can be helpful to talk to a financial advisor that is experienced with insurance policies and can offer guidance on the products available to you. We at Cypress Wealth Services can answer your questions and go over the policies that might be a good fit.

If you have questions about life insurance or would like to schedule a review of your existing policies, call us at 866.888.6563 or contact one of our offices today.


About Cypress Wealth Services

Cypress Wealth Services is an independent RIA firm providing financial planning and investment management to high net worth individuals, families, business owners, and institutions. Cypress Wealth Services comprises professionals with diverse backgrounds and extensive experience and qualifications. Cypress Wealth Services serves a broad range of client needs using their experience and expertise to act as a foundation for their client service process. The firm uses The Second Growth, which focuses on efficiently protecting, growing, and transferring the wealth and legacy a person has already built to their loved ones. With financial advisors in Palm Desert, CA, Tustin, CA, Athens, GA, and Anchorage, AK, the firm serves clients across the country with Wealth Management Services, Fiduciary Services, 401(k) Design and Management, Investment Reporting Services, Financial and Retirement Planning, and more. For more information, visit or call 760.834.7250.