How much life insurance should I carry? Author:    Posted under: Life InsuranceLife Insurance questions answered


It’s the question most people ask themselves when considering taking out a life insurance policy. They’ve asked themselves if they need it, and may have arrived at the decision based on the fact that they have dependents they need to ensure are provided for in the event of their death, or debts that significantly outweigh their assets.

For a long time, there are those who have relied on the ‘rule of thumb’ – that is, they buy a life insurance policy that is five to seven times their annual income. Even insurance agents and financial planners use this outdated and unsophisticated method to compute the face value of their clients’ policies. The problem with this is life insurance needs vary from individual to individual, from a family of three to a family of 6. It’s not one size fits all. So there are those who end up with too much or too little life insurance.

Evaluate Your Insurance Needs

The face value (the amount your policy pays to beneficiaries when you die) of your life insurance policy will be determined by the following factors:

Replacing your income. The first and most important reason why people choose to take out life insurance policies at all is to replace income that will be lost when a provider dies. The income replacement will take up a considerable portion of the total amount of the face value of your policy. In the case of a single-income family, it is imperative that the policy payout be large enough to replace the lost income, plus an additional amount to safeguard against inflation.

Pay off your debts. Consider all your family’s outstanding payables: Mortgage, auto loans, credit cards plus any other loans that you need to pay off. You will need to add the total of your debts to the total figure of the replacement for your income.

Future needs. If you have children who rely on your income, you will also want to ensure that they are able to go to college. Calculate how much it will cost to send your child to university. If you have more than one child, obviously this amount will have to account for all of them. If your family resides in a state with no other relatives nearby, your surviving spouse may want to move to another part of the country where he or she will be with kin. Also incorporate the amount it will cost them to pack up and move to another location.

Once you have determined the face value of life insurance policy you need, comparison shopping would be the next step. Of course, you may also want to insure your loved ones. Your spouse, whether a wage-earner or not contributes to the needs of your family as well. The loss of a stay-at-home parent may also cripple your family – childcare and housekeeping costs are not inexpensive. On the other hand, though the loss of children is heartbreaking, you suffer no financial loss.

Discuss the pros and cons of purchasing term and whole life policies with your financial planner. If you are young and just starting out in your chosen career, term life may be the better choice for you since the premiums for whole life are expensive. Renewable and convertible term life offers just as much coverage, may serve your needs better and is a lot cheaper. You want to be able to pay off your premiums for continuous coverage.

Do your homework, compare prices and coverage limitations and exclusions so that you ensure that your family is financially protected even when you are no longer around for them.

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