The first question that may come up during a talk about life insurance is how much life insurance an individual might need. Many families don’t even consider getting life insurance, which ensures the family’s financial survival in the event of the breadwinner’s death. Many families already have car insurance, health insurance, homeowners insurance, or some combination of the three. However, life insurance isn’t always a routine part of the family’s insurance discussions. Full preparedness for major financial changes, such as the death of a breadwinner, can reduce the emotional toll such an event places on the family.
Who Needs Life Insurance?
Many people may benefit from buying life insurance, but CNN Money advises people to remember that life insurance is important, but it’s usually not a lifelong commitment. An individual who hasn’t gotten married, had children, or created a life with another person may not benefit from life insurance as much as someone with a family. Anyone who has financial dependents may wish to investigate health insurance and figure out how much insurance would be appropriate. Those who do not yet have dependents may want to delay that conversation.
Options Influencing the Cost and Coverage Amount of Life Insurance
MSNBC shares that many Americans receive life insurance as part of their benefits package through work. However, these policies tend to offer lower coverage amounts than policies bought outside the workplace. When figuring out how much life insurance is needed for the family, comparing coverage amounts and costs for workplace plans versus privately bought plans is recommended. If a lack of life insurance would force the family to make drastic changes or face unaffordable costs after the breadwinner’s death, considering more life insurance than what might be offered through work could help the family avoid financial problems at a future date.
Evaluating the Need and Amount of Life Insurance
Once the family has determined that life insurance would prove beneficial, there are three factors to consider in figuring out the appropriate size of a policy. These factors include the family budget, various financial obligations, and the family’s assets.
Evaluate the cost to run the family’s household. Tallying the amount of money the family spends each month should include regular costs like gas, food, and utilities, as well as payments on insurance, the mortgage, and all the costs that would come after the breadwinner’s death. Funeral costs and estate taxes could impact the family’s budget significantly, and the life insurance policy would offset those costs.
Add up the future costs for the family. A family with young children might want to put those children through college or buy them cars when they reach driving age. A large life insurance policy will help the family cover the cost of college in the event the breadwinner passes away while the children are still young and the family hasn’t yet had a decade to save for those future tuition costs.
Examine the current and future assets. A family who already has significant savings and resources might not have a need for a large life insurance policy. For example, a couple who married a few decades ago might not have more than a few years left for mortgage payments, or they might have an empty nest with no significant costs for child rearing. Existing emergency reserves, investments, and savings plans may reduce the amount of life insurance needed.
How Much Life Insurance Should a Family Buy?
Insurance experts usually recommend that a family calculate how much the breadwinner might earn at his or her job over the next several years and buy a policy based on that number. The number of years in that calculation may vary from ten to twenty. According to Kiplinger, the number should also include funeral expenses, debts, and education expenses, as well as the income replacement amount. For example, an individual earning $50,000 a year might purchase a $500,000 policy that would equal ten years of his or her income.
Related Resource: 10 Best Cheap Life Insurance Companies
Speaking with an insurance agent can help a family figure out the most appropriate level of life insurance coverage, but it may benefit the family to handle some calculations in advance of that meeting. The insurance agent can help explain other factors that may influence the amount of insurance bought like conversion to permanent life insurance and the difference between whole-life and universal-life insurance. Figuring out how much life insurance a family needs will ensure the family’s survival no matter what might happen in the future.