Money Management

Family size and the amount of debt you have are both factors to consider. 

Life insurance is a gift for those left behind after you’re gone. Far from morbid, financial planning for after your death is a loving and generous act. How much life insurance you need, and what kind, can change over time. Here’s how to approach the decision if you’re around age 40.

How much life insurance does a 40-year-old need?

When it comes to calculating how much life insurance you need, there isn’t just one rule of thumb. There are several. The one that’s right for you depends on your family obligations, the standard of living you wish to provide, and how much debt you have.

Methods of calculating life insurance needs

Final expense life insurance

Pre-planning to cover final expenses can relieve financial stress during a time of grief. You can buy a small amount of coverage that will help your loved ones pay for your memorial and burial or cremation. A funeral typically costs $7,000 to $12,000. A hosted reception with refreshments would add to the total.

Most term life insurance providers will not offer a policy this small. You’ll need to get a permanent life insurance policy. There are different kinds, like whole life insurance and universal life insurance. The cost is higher compared to term life insurance, but if you are in good health, you might pay as little as $25 per month for a whole life policy of this size.

Ten times your salary

This simple formula is easy to calculate. If you earn $50,000 per year, you would buy $500,000 in life insurance. If you’re 40 and single but want to leave a gift, the 10 times rule is a good benchmark.

For a 40-year-old woman in excellent health (not a tobacco user), a $500,000 20-year policy could cost about $30 per month in California (all other examples are for California, as well).

Ten times your salary plus $100,000 per child

Debts, especially a mortgage, could easily consume a six-figure life insurance benefit. Ten times your pay sounds smaller and smaller as you consider the expenses that will chip away at it. This formula gives you more coverage that could help raise and educate your kids.

If you earn $50,000 per year and you have two children, you’re looking at $700,000 in coverage.

For a 40-year-old man in excellent health, this policy might cost $40 per month.

D.I.M.E.

With the D.I.M.E. method (debt, income, mortgage, education), you add up your debt, including your outstanding mortgage balance, plus the income you expect to earn until all of your children reach age 18 and the amount you expect to need to cover your kids’ education expenses.

The average 40-something has around $350,000 in mortgage debt, and that doesn’t include student loans, cars, credit cards, and other debt. With two kids, even on a modest salary you might find that you want a $1 million life insurance policy.

A 40-year-old man in excellent health might pay around $50 per month.

Your salary times the number of years until you retire

Some working adults want to provide their loved ones with the same income even if something should happen before their working life is over. The formula is simple — your salary times the number of years until you retire.

Today’s 40-year-olds will reach full retirement age and become eligible for Social Security at age 67. If you earn $50,000, you would want a policy for at least $1.35 million.

You can get a 30-year term life insurance policy for this amount for about $100 per month. If you opt for a 20-year policy, the premium drops in half.

How much life insurance should you buy?

When it comes time to decide how much life insurance to buy, the first thing to keep in mind is that life insurance premiums will never be lower than they are right now. They go up as you age. You can get more coverage for less money now, compared to the options that will be available to you if you wait. Also, if you end up with a health condition in the future, that could affect your rates or even your ability to be insured at all.

You are the only one who can decide how much life insurance is enough, and how much of a monthly premium you can afford to add to your budget. Any amount is a gift. You don’t have to buy so much that you make people rich when you die. But if you can, budget for enough to pay off your debts and help ease the financial transition to life without you.

Our picks for best life insurance companies

Life insurance is essential if you have people depending on you. We’ve combed through the options and developed a best-in-class list for life insurance coverage. This guide will help you find the best life insurance companies and the right type of policy for your needs. Read our free review today.

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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What does this mean for you? 

Ally Financial is one of the largest banks in the country, with close to $200 billion in assets and over 11 million customers. Ally is known for its great customer service, low fees, and no-hassle banking experience. But recently, its reputation took a hit when Barclays downgraded it from “Overweight” to “Equal Weight.” On top of that, Bank of America (BofA) also downgraded Ally by two notches to “Underperform.” So what does this mean for consumers? Here’s why Barclays downgraded Ally and how this will affect bank account holders.

What led to the downgrade?

According to Barclays, the entire banking sector is expected to face “a slowing economy and possible recession.” As a bank that services lower-end consumers, Barclays sees a darker future for banks like Ally since these consumers are the most vulnerable to high inflation, interest rates, and reduced stimulus funds.

Barclays cut its Ally price target from $40 to $33 and BofA cut its price target even more, to $26. According to Bank of America analyst Brandon Berman, “Rising interest rates are pushing funding costs higher while simultaneously causing loan demand to slow. Moreover, we think investors will need to see evidence of credit quality performing better than expected before rewarding shares.”

The stock market, including Ally Financial, has been volatile since the start of 2022. In the past 12 months, Ally Financial shares hit a record all-time high of $53.83 and in late December dropped by 50%, hitting a low of $22.34. Due to loan growth slowing and loan losses increasing, Barclays believes the bank is even more vulnerable this year.

How will this affect customers?

For existing customers of Ally Financial, there should not be any major changes in terms of customer service or product offerings. Upgrades and downgrades by stock analysts help give investors insight into a stock’s performance. An upgrade means the analyst is optimistic about the stock’s prospects. A downgrade means the analyst is pessimistic about the stock’s prospects.

Downgrades typically occur in reaction to company news, expectations, earnings, and more. Downgrades and upgrades typically have an impact on the stock price in the short-term. It doesn’t necessarily reflect only the health of a company, but if the current stock price is justified based on its fundamental and technical analysis in the short-term. On the day Ally Financial was downgraded, the stock dropped by 4%. However, since then the stock has rallied by 20%.

Ally Financial is FDIC-insured, which covers $250,000 per depositor and each account ownership activity. While it is unlikely the bank will fail, you can open accounts at different banks or in different ownership categories at Ally to maximize your insurance coverage. Additionally, customers may want to look into other banks if they are offering better products or rates than Ally Financial.

Overall, while the recent downgrade by Barclays may be concerning for some investors and customers alike, it does not necessarily reflect poorly on the bank itself or its product offerings — at least in the short-term. That being said, customers should remain vigilant and keep an eye on any potential changes. By doing so they can ensure they are getting the best possible value from their financial institution.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Ally is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. The Motley Fool has positions in and recommends Bank of America and Target. The Motley Fool recommends Barclays Plc. The Motley Fool has a disclosure policy.

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It’s something you shouldn’t gloss over. 

If you’re in the process of shopping around for life insurance, good for you. Without life insurance, you might end up leaving your loved ones in a financial lurch in the event of your passing.

But simply buying life insurance isn’t enough. You’ll also need to make sure you have the right amount of coverage so your loved ones truly don’t have to worry about money in your absence.

Now, you’ll often hear that your life insurance payout should be enough to replace your salary for 10 years. Some people will even tell you to buy enough coverage to replace 20 or 25 years of your income.

The more income you’re replacing, the more expensive your life insurance policy is apt to be, so you don’t simply want to tell yourself “more is better.” Instead, you’ll need to strike a good balance between adequate coverage and affordable premiums.

But it’s not just your salary you should be accounting for in the course of buying life insurance. There’s another big expense you’ll want your insurance policy’s benefit to cover.

Don’t forget your mortgage

Financial guru Suze Orman is a firm believer in buying life insurance. But in a recent podcast episode, she cautioned those in the process of shopping for life insurance to keep one key expense in mind — their mortgages.

If you own a home jointly with a spouse, and your spouse doesn’t work, they may not be in a position to keep up with those mortgage payments in your absence — even if you leave behind a nice amount of insurance money. That’s because your spouse might need that money to cover other expenses, like utility bills, food, and medications for themself and your kids.

Even if your spouse does work, if you signed your mortgage as a dual-income family, you may be able to cover your monthly payments with relative ease due to having two paychecks. But if your income goes away, your spouse may not be able to cover the mortgage on their own — even with insurance money factored into the mix.

That’s why it’s a good idea to make sure your life insurance payout can not only replace many years of your income, but also, pay off any joint debts you and your spouse hold. And so if you have a mortgage, that’s one debt you’ll want to address.

Get that number right

A lingering mortgage can be a huge burden at a time when your family experiences a major emotional and financial loss. So it’s important to make sure your insurance payout accounts for that debt.

Let’s say you earn $80,000 a year and want to leave your loved ones with a life insurance benefit equal to 10 times your salary. If you also owe $200,000 on your home, don’t just go with an $800,000 death benefit. Instead, aim for $1 million if you can afford the premiums. You’ll be doing a really good thing for your loved ones as they cope with a host of difficult changes.

Our picks for best life insurance companies

Life insurance is essential if you have people depending on you. We’ve combed through the options and developed a best-in-class list for life insurance coverage. This guide will help you find the best life insurance companies and the right type of policy for your needs. Read our free review today.

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

 Read More