How Much Life Insurance Do I Need? | Bankrate
Life insurance can be a valuable financial tool for many people, whether you want to protect your growing family or support a beloved charity. however, choosing the right amount of life insurance coverage for your needs can be challenging. There are many important things to consider, such as your current income and assets, the number of financial dependents you have, and your family’s current lifestyle. Before you choose your life insurance coverage limits, here are a few things to keep in mind and some calculations to help you come up with a number. Generally, it’s a good idea to consult with a certified financial planner before purchasing a policy to make sure you’re purchasing the right policy to meet your financial goals.
what is life insurance?
Life insurance provides a financial payment to one or more beneficiaries of your choice in the event of your death. Depending on the type of policy, life insurance will cover end-of-life expenses, such as a funeral or outstanding debt, or provide compensation to maintain dependents’ quality of life or future financial needs. In effect, life insurance provides some degree of assurance that your beneficiaries’ financial needs will be covered (up to the policy limit or death benefit) in the event of your death.
who needs life insurance?
Most people can benefit from a life insurance policy, depending on their financial situation and obligations. If you have dependents who are financially dependent on you, such as children, a disabled parent or sibling, a spouse, or anyone else, you may be a good candidate for some type of life insurance coverage. Even if you don’t have any financial dependents right now, life insurance might be a good option, and buying a policy while you’re still young and healthy can help you get a lower rate.
How much life insurance do I need?
The answer to the question of how much life insurance a person needs depends on several factors, including:
- your age
- the ages of your spouse and children
- your income
- your mortgage and other debts
- college expenses for your children and/or spouse
- the invoice of the final expenses
- Debt and Final Expenses: Get a solid number based on all the debts you owe and include the costs of each parent’s final expenses.
- Income: For income, a good rule of thumb is to think about how many years your family would need income in your absence. multiply the number of years by your annual income.
- Mortgage: Include the total amount owed on your mortgage and any assessed property taxes. Similar to income, think about how many years your family would need the money to cover property taxes, and then multiply your total annual taxes by those years.
- education: Determine the total cost of educating each of your children through high school and college.
- Your age: Life insurance premiums generally increase with age. If you’re young, getting a term life insurance policy (which provides coverage for a certain number of years) is generally considered the most cost-effective way to provide financial protection for your family.
- Age of spouse and children: This helps you estimate how many years of income replacement financial dependents would need if you were to die.
- Mortgage and Debt: When choosing a life insurance coverage limit, be sure to factor your home mortgage, car loans, student loans, and other debt into your decision . Most debts don’t go away when you die, so your family members will likely be responsible for making the payments.
- College Expenses: Consider future education expenses for the children and possibly your spouse. tuition and fees for four-year colleges have increased by as much as 5.2 percent, on average.
- Your current income: If you have no outstanding debt, no major future expenses (like college tuition), and you have a healthy savings account, you may not need to replace your entire income . some advisors recommend a 50% replacement as a starting point.
- Funeral Expenses: The average cost of a funeral, burial, and related expenses exceeds $7,000, while the average cost of cremation ranges from $2,000 to $4,000. It’s a good idea to purchase enough life insurance to cover end-of-life costs, otherwise you could create financial stress during an already difficult time for your loved ones.
what is the main difference between term life insurance and whole life?
Can you have more than one life insurance policy?
how do I find the cheapest life insurance?
Your circumstances may vary the amount of insurance you need in a policy, but expert recommendations also advise thinking about what is most practical for your immediate and future situation.
“You want them to get through this traumatic event with some nice options, but that’s about it,” says Glenn Daily, a New York City-based fee insurance advisor. “A famous agent once said that the whole point of life insurance is to allow his family to ‘stay in their own world’. it does not necessarily mean that they have to maintain their current lifestyle. maybe his spouse will decide to do something completely different.”
There are several ways to calculate how much life insurance you should buy. You may choose to speak with a certified financial planner who can assess your financial situation and make a recommendation based on your family’s potential needs. You can also use a free online coverage calculator to get a general idea of how much coverage you need for yourself.
Another option is to use one of the popular models devised by insurance companies and financial experts. Here are three common approaches that can help you choose a life insurance coverage limit:
1. the dime formula (and the rule of 10)
The old rule of thumb for “how much life insurance do I need” was to take your income and multiply it by 10. This was the industry standard for many years. however, this does not take into account several things.
in particular, it does not take into account the maintenance expenses of his family. this could vary greatly if you have one child or four. In addition, it does not account for single-income families.
As grim as it sounds, it’s important to ask yourself what would happen if you and your partner died and only one of you had coverage. the rule of 10 left many questions unanswered. in its place came the dime formula, which takes into account the following:
once you get that final number, you might want to consider doubling it for both parents. That way, if something were to happen to you and your partner, your children and other financially dependent family members would have sustainable incomes in the future.
2. deficit calculation
The deficit approach works backwards from the annual income you would like to leave to your spouse and family for x number of years. After deciding on this target number, subtract all other sources of annual income that will be available to them, such as your retirement accounts, pension, savings, your spouse’s salary, and Social Security. the resulting number is the shortfall you’ll want to replace with life insurance.
“People overlook that they’ll probably have other assets,” says insurance literacy advocate tony steuer, author of “life insurance questions and answers.” “right now, you may just be starting to save for retirement, but by the time you retire, you’ll have $500,000 or $1 million in your retirement plan, so you may not need that life insurance policy anymore of $500,000”.
3. income generator
Some prefer to set their sights on building a large life insurance investment that would generate profits to provide annual income for a beneficiary. for example, $1 million invested using a conservative 4 percent average annual return could provide $40,000 a year to a spouse or family in perpetuity.
“While the need for life insurance is temporary for most dependents, there are exceptions, such as a special needs child who will never be self-sufficient, where the need lasts for the rest of their life,” says Steuer, who is also the director of financial preparedness for the united policyholders of the insurance consumer group.
daily says that while there is no single model that fits all families, everyone can benefit from trying one or more.
“The nice thing about looking into the future and not just the present is that you’ll get an idea of whether your insurance needs are going up, down, or staying about the same,” he says. “That’s going to have some relevance to the type or mix of insurance you should buy.”
factors to consider when buying life insurance
You may be wondering, “how much life insurance should I have?” consider these factors:
sources: etti baranoff, glenn daily, tony steuer
more information: average cost of life insurance
choosing your life insurance policy
Once you arrive at a ballpark coverage figure, it’s important to decide which type of life insurance is best for your needs. The two main types of life insurance are term life insurance and permanent life insurance, which comes in several different forms, such as whole life insurance and universal life insurance.
Term life insurance and permanent life insurance differ in some ways. First, term life insurance offers protection limited to a certain amount of time, usually between 10 and 30 years, although some insurers may find shorter and longer terms. Permanent life insurance, on the other hand, offers lifetime protection under most circumstances, as long as you continue to pay the premium.
Also, term life insurance is often the most affordable option while you’re young and healthy. however, premiums get more expensive with age. Permanent life insurance may have higher premiums, but it provides the added benefit of cash value. With each premium payment, your cash value grows in a savings account, and once you reach a minimum threshold, you can withdraw or borrow the money at any time for any purpose.
so which policy is right for you? steuer suggests letting your individual circumstances dictate whether to use a whole life (permanent) policy with cash value, term life, or a combination.
“One tactic I recommend is to separate planning for your spouse from planning for your children, because the timeline for needing coverage may differ,” he says. “If you have a 15-year-old son, then you really only need a 10-year term policy for the son to finish college. But if you’re 45 and planning to work for another 20 years, your non-working spouse will need at least a 20-year life insurance policy.”
However, when choosing a type of life insurance, it’s important to understand what you can realistically expect from your policy. All three experts caution against being fooled by the siren songs of cash-value life insurance products that promise big investment returns you could take advantage of while you’re still on this side of the lawn.
“That’s one of the main reasons people overbuy,” says Steuer. “You want to remove all distractions and address your real needs. don’t expect something from your life insurance that you wouldn’t expect from your other insurance policies.”
Baranoff puts it even more succinctly: “Life insurance is for widows and orphans.”