How Much Life Insurance Do I Need?
The question of how much life insurance do I need can be an intimidating one to answer. We have provided some guidelines to make this determination an easy process. The key question to answer first is. Do I have family or others that depend on me? If the answer is yes, then proceed forward to the question of which type of insurance fits your lifestyle and how much coverage do you need.
Second, it is important to determine which type of life insurance you need. Whole life insurance is a policy that remains effective the duration of the insured’s life, as long as premiums are paid. A whole life insurance policy is comprised of fixed premiums, which are based on the age of issuance, and usually do not increase with age. In comparison, a term life policy provides a fixed rate of payment for a limited period of time. At the time the policy expires, it is up to the insured to reinstate the policy, in which coverage at the previous rate of premiums is no longer guaranteed. Term life is the least expensive way to obtain a substantial life insurance policy, which will ensure the beneficiary receives funds to supplement the loss of income to the family.
Next, how much coverage do you need? Standard formulas such as buying coverage eight to ten times the amount of your annual salary is inadequate. You’re better off using a systematic approach that account for life changes including: marriage, parent hood, home ownership, college expenses and retirement. Therefore, this question can easily be answered by using our Life Insurance Calculator. With a term life insurance policy, our purpose is to provide a plan which will act as a supplemental income in the event we face death. Factors in determining the amount of coverage needed include analyzing income vs. debt, comparing monthly expenditures, as well as calculating in your annual salary.
Four Main Categories for Figuring Out How Much Life Insurance You Need
Another guideline in determining how much term life insurance you may need, can easily be thought about
under the following four categories:
1. Funeral Expenses. The cost of a funeral and burial can be $10,000- $20,000. With a term life policy, the beneficiary will be able to receive these funds sooner than perhaps waiting on funds from your estate. Therefore calculate in $15,000 for this expense.
2. Mortgages and other debts. In this category, sum up mortgage balance, car loans, student loans, and any other debts in which our beneficiary may obtain responsibility. Depending on interest rates, the mortgage may not be retired, however these funds need to be available to prevent your loved one from being forced to sell your home.
3. Education Expenses. To calculate this number, calculate the cost of college at the time your children/grandchildren will be enrolling. College expenses have continued to rise 5% per year. You can get an idea of the current cost of the college(s) of interest and calculate in their cost, to cover all or some of the education.
4. Income Replacement. Once funeral expenses and other debts have been accounted for, it will not be necessary to provide 100% of your salary replacement coverage. It is recommended to provide coverage for 50% of your pre-taxed income up until retirement.
These four categories can be use in determining the appropriate amount of life insurance coverage that is needed for your family, also keeping in mind your personal lifestyle and other expenses. Take into account if your spouse earns a substantial income, in which you might not need as much coverage. However it is important to take into consideration if you have an illness which may prevent you from being able to obtain coverage in the future. In this event, you may want to add $100,000 to $250,000 extra.
With the use of these four tools, and the Life Insurance Calculator. a family will be urged to purchase a policy that pays out in the 6-digits, even $1 million or more. With a term life insurance policy, this amount of coverage should be obtained for only a few hundred dollars a year.