How Much Life Insurance Coverage do You Need?
Whether you’re a college student, a young parent, or about to retire, you may be thinking about investing in life insurance. People buy life insurance for many different reasons. Some may have just enough to cover funeral expenses should something happen to them. Others need to cover debts in case of an untimely demise, and still others could leave behind loved ones who would be in serious trouble without their incomes. If you’re deciding whether or not to get life insurance and how much you should get if you do need it, here’s the information you need to make this important decision. Home Insurance
Who Needs Life Insurance?
Many people assume that anyone with a family or spouse needs some life insurance but this is simply not true. In some situations, even married people who have children may no longer need life insurance, although anyone with young children living at home should have at least some coverage. Here are some reasons that you might need life insurance. If you can identify with any of these reasons, you might want to consider taking out a life insurance policy.
1. You are single but have large debts to pay. If no one has cosigned on your debts, your family members won’t be technically responsible for them in case of your death. However, it isn’t too hard to purchase just enough life insurance to cover your debts plus your funeral expenses just in case. By making sure your debts are covered, you ensure that you can leave other assets � valuable personal belongings, cars, paid-off homes, etc. � to your heirs.
2. You own a business. This is one many people don’t think of. However, if you own and have a large part in running your own business, life insurance could be a good idea. You’ll have to be clear about what the insurance is for, and you may even want to have separate policies for your family and your business. The money that goes to your business can go towards paying off debt or helping your partners stay in business in spite of your death.
3. You are married. Even young married couples without children should consider purchasing life insurance policies. Even if you don’t have a lot of mutual debts that your spouse would have to pay, if you bring an income into the relationship, you’ve probably got a higher rent or mortgage, car payment, or other financial obligations than your partner would be able to afford on his own. Having life insurance ensures that your spouse can maintain the same standard of living � or at least have time to grieve before making other arrangements � if you die unexpectedly.
4. You have young children or dependents who will need to remain at home for whatever reason. Any family with children should always have life insurance. Your family depends on your income to put food on the table and to save for college. Even if your spouse or partner could pay the bills on one income, you’ll want to have insurance to set up a college fund for each of your children, at the very least. If you have handicapped dependents � whether children or a spouse � who would need constant care after your death, life insurance is absolutely a must.
5. You stay at home to keep up the household and provide care for your children. Many couples in one-income families fail to think about this, but it’s important! Stay-at-home moms and dads provide vital services to their families that would cost a great deal of money if those parents were no longer around. Consider that if a stay-at-home mom dies, her husband is left paying for childcare, most likely a larger grocery bill since no one will cook from scratch, and maybe even cleaning services to stay up on the house. Life insurance can offset these costs, so get it on both spouses, even if one stays home with the kids.
6. You don’t want to burden your family with funeral costs. Funerals are expensive, averaging about $6,000 these days! A small term insurance policy that could cover these costs can be helpful for your family during a time of grief.
As you can probably see from this list, a person’s life insurance needs will change through time. When you’re single, you might want just enough coverage to pay your debts. As a married person without children, you’ll want to up your coverage to give your spouse a bit of breathing room in case the unexpected happens. When you have children at home, you’ll have the largest life insurance policy. After that point, you can taper off your insurance policy until it’s really just enough to cover funeral costs after your children are grown and your home is paid for.
How Much to Get
Deciding exactly how much life insurance to get can be frustrating. You’ll hear different things from different people, but the truth is that it’s definitely a personal decision. One rule of thumb is to get life insurance for ten times your annual income. This is a good arrangement if you want your family to be able to use your life insurance money mainly to transition to a new standard of living and to save for the kids’ college.
If you want to use life insurance as a way to provide your family with the equivalent of your income for the rest of their lives, you’ll probably need more � a lot more. Figure out how much money you would need to invest conservatively � earning about 5% to 6% a year � for your family to get your income out of the interest alone. If you want to leave them in the same financial situation after you’re gone, you don’t want them to tap in to the principle.
As you can see, each of these options will leave you with different calculations. Figure out what your family needs and what your life insurance goals are before you purchase a policy.
