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How Much Life Insurance Do You Need?

Unpredictable job and investment markets make it difficult to determine how much life insurance to buy. The standard formulas for buying coverage to match a specific percentage of income are inadequate solutions. Online calculation tools usually tell everyone to raise their coverage by $1 million. However, life insurance is a personal issue. For example, a married couple with three children and a mortgage will need more coverage than a childless couple without a mortgage. When the markets are down, many people are tempted to shrink their life insurance needs. Major life changes also affect how people deal with their individual needs. It is best to take a systematic approach to buying coverage instead of relying on standard rules and formulas.

How Much Life Insurance Do You Need?

Unpredictable job and investment markets make it difficult to determine how much life insurance to buy. The standard formulas for buying coverage to match a specific percentage of income are inadequate solutions. Online calculation tools usually tell everyone to raise their coverage by $1 million. However, life insurance is a personal issue. For example, a married couple with three children and a mortgage will need more coverage than a childless couple without a mortgage. When the markets are down, many people are tempted to shrink their life insurance needs. Major life changes also affect how people deal with their individual needs. It is best to take a systematic approach to buying coverage instead of relying on standard rules and formulas.

One Simple Strategy


The main purpose of life insurance is to provide survivors with enough funds to pay the final expenses and continue life comfortably. This is why most calculators are programmed to suggest a chunk of money equal to at least 20 years of regular income. With overall longer life expectancy and a lower savings yield, this may be too high of a goal for most people. There is a much simpler strategy for figuring out exactly how much insurance is needed. It is also better to buy from a plan that is easy to update. After projecting personal needs from the following four categories, assess the situation to see if extra coverage or different policies are needed.

  1. Debts & Mortgages
    Write down the total of all auto loans, mortgages, student loans and any other debts. All of these debts may be a serious burden for survivors to handle. However, survivors may choose to keep up mortgage payments. Be sure to allow enough money that this will be possible.
  2. Final Expenses
    Traditional funerals may cost between $10,000 and $20,000. While pre-planning a funeral is beneficial, it is even more important to ensure enough life insurance funds are available to pay the final bill. For a reasonable funeral figure, aim for $15,000.
  3. Income Replacement
    Families will not need 100 percent of the policyholder’s current income. Be sure to deduct final expenses, education costs and debts. As a rule, it is best to plan on replacing 50 percent of pretax income until retirement. This amount can be placed in a lump sum by dividing 50 percent of annual income by 0.05.
  4. Education Expenses
    This may be one of the most difficult calculations. Each school varies in tuition costs, and the tuition rates may be much different by the time children are ready to enroll in college. The average cost of college tuition has been rising by about five percent each year. This is the same rate life insurance is expected to grow over time. Calculate the future cost of tuition at the desired colleges, and add the amount to a life insurance policy.

To determine how much life insurance is needed, add all four of these categories’ totals. If there is no pension, it is beneficial to increase the amount. However, if a spouse earns a considerable salary, it may be feasible to decrease the total. For family members with unique or troublesome medical conditions, add between $100,000 and $250,000. The overall total usually adds up to a six-figure amount or slightly over $1 million. Increasing a death benefit on a term life insurance policy usually costs several hundred dollars each year, so the premium amount should not be impossible to pay. To get a better idea of what to expect for a premium, discuss the figures with an agent.

Getting married, having children, buying property and retiring are all life steps that require more life insurance. There are many different options for this coverage. Young and healthy individuals can usually lock in a low price for many years. Some policies also come with the option to convert to permanent coverage, which can be kept regardless of future health conditions. Term life becomes expensive after age 65, so it is a smart idea to consider whole or universal policies. To determine the best option, discuss personal details with an agent. 

How Much Life Insurance to Buy

Purchasing life insurance is a wise action. However, many Americans do not buy enough coverage to suit their needs. Every little bit helps, but an insufficient amount can leave survivors struggling to make ends meet. Research shows that more than 30 percent of adults do not own life insurance policies. Unfortunately, the majority of those who do have coverage do not have enough. In America, the collective value of life insurance policies tops $10 trillion. Although this number may sound astonishing, it represents less than 75 percent of American citizens’ combined income. Uninsured families know they are taking a risk, but the majority of families with insufficient coverage do not realize their mistake until it is too late. Those who do not have life insurance should obtain it immediately, and anyone who has a policy should examine it carefully.

Picking the Right Amount
It is difficult for people to determine how much life insurance they need. There are a few different ways to calculate the proper amount. Although some experts recommend tripling income, others claim it is best to multiply annual income by eight. However, set multiplication figures may not be the best idea for every person. Families and individuals have varying needs, and everybody’s situation is different. For example, two families with the same income may have very different expenses. One family may have very little debt and healthy children. The other family may have extensive debt and a child with an expensive lifelong illness. The second family would probably need to multiply more than double their annual income to ensure adequate coverage.

One easy way to determine how much coverage to purchase is to answer the following questions:

- How much money will survivors need to continue paying the mortgage?
- Will the surviving partner need to pay childcare expenses? If so, approximately how much each year?
- How will inflation affect survivors’ finances in the future?
- Approximately how much money will each child need for college tuition?
- Would the surviving partner have enough money to quit work to take care of the children?
- Will a surviving partner have enough money to make adequate contributions to a retirement account?

It is important for couples with children to talk about childcare and work. Some people may prefer to quit work to take care of the kids. However, others may feel they need to keep a job for their own mental health benefit. Make sure adequate provisions are made for either option. After answering all of these questions, it is easier to choose an accurate policy amount. In addition to buying enough coverage, it is important to buy the right type of life insurance.

Understanding Types of Policies
The two most common types of life insurance are term life and cash value. Term life provides coverage for a certain amount of time. The term may be one year, five years or even 30 years. Since they are designed only for protection, term life policies are less expensive. It is a good option for families who want to have a higher amount of protection for less money until their kids reach a certain age. Cash value coverage lasts for the insured’s entire life. This type of coverage serves as an insurance policy and a savings plan. Insurance companies invest some of the premium, so the policy accumulates cash value without tax consequences. After several years, it is possible to borrow money from a cash value policy. Loans are not considered income, so there are usually no tax penalties. However, withdrawals are deducted from the death benefit. To make sure enough life insurance is purchased, discuss personal circumstances with an agent. 

 

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