Life insurance may not be the most exciting financial product, but it’s one of the most crucial aspects of financial planning. Life insurance offers peace of mind by protecting your loved ones in the event of your passing. I’ve heard several complaints about the cost of life insurance, given the small likelihood that it will ever be used. Personally, I hope I get to enjoy the privilege of paying my premium for the next 20+ years! Try to look at life insurance the same way you look at auto or home insurance: it’s essential, but you never want to cash it in.

Why is life insurance important?

The primary purpose of life insurance is to provide a financial safety net for dependents by letting them maintain their lifestyle and covering essential expenses after you’re gone. This is particularly important if you are the breadwinner. The payout, known as the death benefit, replaces lost income, pays off debts, covers everyday expenses and funds future needs, such as education for your children. If you have significant liabilities — like a mortgage, car loans or personal debt — a life insurance policy keeps those obligations from falling on your loved ones. There are also residual financial costs associated with a death in the family. End-of-life expenses can be costly, with the average American funeral costing between $7,000 and $10,000. Life insurance helps cover those costs, keeping your family from enduring financial burdens during an already difficult time. I firmly believe that almost everyone with dependents should have life insurance.

Ideally, insurance of any kind should help you hedge against improbable but devastating events. Life insurance is the perfect example of this, as a healthy individual of 30 years can get a million dollars of coverage for a 30-year term at around $50-$80 a month. This isn’t pocket change, but given what it protects your family from, it is well-worth the cost. There is a common saying thrown around the insurance world: “Your excuses for not buying life insurance will only sound ridiculous to the survivor.” I tend to agree!

While there are any number of insurance products, term life insurance will satisfy most needs. Term life provides coverage for a specific period (such as 10, 20 or 30 years). It’s affordable and straightforward: if you pass away during the covered term, your beneficiaries receive the death benefit. If you outlive the term, the policy expires and no payout is made.

Term life is ideal for coverage during high-responsibility years, like when raising children or paying off a mortgage. When I turned 30, I decided to have kids, so I got a 30-year term policy that would last me until I turned 60, at which point I would no longer need coverage — my home would be paid off, my kids would be through college and my wife’s retirement would be funded. At that point, my family would no longer need life insurance, unless I acquired such a large estate that I needed to adopt a more complex insurance strategy for estate planning purposes.

To determine the amount of coverage you need, first assess your specific financial needs and those of your dependents. A common rule of thumb is to aim for coverage 5 to 10 times your annual salary. But that’s only a starting point. If you live in California, your mortgage alone may require a million dollars in life insurance. Your specific needs will depend on various factors, such as the size of your family, your outstanding debts, your future financial goals (like your children’s education) and whether you have multiple streams of income.

Life insurance is a vital part of financial planning, providing a financial safety net for your loved ones. Whether you’re a parent, spouse or someone with financial responsibilities, life insurance offers invaluable peace of mind. By assessing your needs and securing an appropriate policy, you can know your family will be cared for, no matter what the future holds.

Zach Harney is a wealth advisor at Monterey Private Wealth, Inc., an independent wealth management firm in Monterey. He welcomes questions you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Zach Harney, 2340 Garden Road Suite 202, Monterey, CA 93940 or email zach@montereypw.com.