How much life insurance do I need?
HOW MUCH LIFE INSURANCE DO I NEED?
Many people consider life insurance as an added expense, only to regret later on when an unexpected event happens. Sure, it isn’t fun to be talking about the grim realities of life (or death, for that matter), but it’s also less exciting to think about the family you leave behind should you pass this world uninsured.
The thing is, many people think that life insurance is essential, but they tend to push the thought away until it’s almost too late. It is important to remember that buying life insurance is an integral part of financial planning, and it’s one of the best legacies you can leave behind to protect and secure your family’s future.
Why is Life Insurance Important?
It isn’t pleasing to imagine what will happen to your family after you’ve passed away, but that’s what exactly what life insurance is for. You hope never to use it, but it gives you a significant amount of peace of mind to know that it’s there.
Unfortunately, Life Insurance Statistics and Facts report that around 43% of Americans don’t have any life insurance. It’s sobering to think that almost half of the population is neglecting this critical aspect of financial planning.
But why is life insurance vital? Here are the top reasons why you should start considering getting life insurance right now.
Provide for your family’s needs
If you are the primary source of income in your household, then all the more that you should consider getting life insurance. Once you are gone, so is your income, and it would be tough for the family to live that same level of lifestyle that they’re used to. Life insurance replaces your income so that your family could carry on with their lives comfortably. This is especially important for households wherein one spouse works and the other isn’t. Insurance for one or both of you give financial coverage for the family so that they can carry on with their lives and sustain their needs when the breadwinner has unfortunately departed.
It’s uncommon to find people getting into debt for a variety of reasons. Lifestyle needs like a car and home become long-term debts. Some people even go into debt to finance a vacation, home improvement projects, or their child’s wedding and vacation. The debts you incur in this lifetime are likely to become a burden to the family you leave behind. It’s already trying time for them, and with debts to worry about, it can get very stressful. These debts can become financially devastating for the family, even if you leave behind a spouse who works and earns an income.
Life insurance gives you and your family good leverage over these debts. Your dependents can use your life insurance to pay off debts you’ve left behind so they can maintain their lifestyle and financial standing even after your passing.
Not many people readily make the connection between life insurance and comprehensive retirement planning. But the truth is, life insurance can bring numerous benefits in your golden years. For one, life insurance can supplement financial gaps in the family should one of the parents pass away. The death of one spouse can also mean the end of one’s social security pension and retirement income. But with life insurance, the surviving spouse can sustain his or her lifestyle without taking a financial hit.
Achievement of family’s financial goals
The appropriate life insurance policy can be vital in taking care of your loved ones and help them realize their financial goals, both short-term and long-term. Even without you physically present for them, your life insurance coverage becomes a remarkable legacy that allows your family sustain their financial needs. They can use the policy to settle loans and debts, as well as attain their financial goals like continuing education, establishing investments and savings.
Protect your business
Life insurance is often regarded as a means to secure and protect your loved ones’ financial future, but it can also be a handy way of keeping your business alive, even after your death. Getting a life insurance policy that’s specially made for entrepreneurs ensures that your share of the enterprise will go to rightful hands. In most cases, the surviving business partner may acquire your stock and the proceeds of the sale shall go to your beneficiaries or nominees.
For your peace of mind
Death will come to all of us. But while we’re alive, we continue to worry and look after the welfare of our family. What happens to them should you pass unexpectedly, leaving the brood in emotional and financial distress? Whether you pass away today or tomorrow or several years from now, having life insurance gives you the peace of mind that your family shall be financially provided. It’s true that a person is irreplaceable, but having life insurance is one of the best things that you can do for your family while you are alive.
When Do You Need Life Insurance?
Although most people know that they need life insurance, they are often stuck wondering when exactly they need it. Nothing is certain in life and the best time to get life insurance is when you don’t need it. You don’t want to wait until a financially devastating event affects your family and say you need life insurance today.
In most cases, people get life insurance or update their policies when they encounter certain life events, such as the following:
Typically, people enter a marriage first before they buy their first home or give birth to their first baby. With that said, marriage becomes the first stepping stone into real-life adulthood where responsibilities and expenses increase.
The earlier you start paying for life insurance when you get married, the lesser premiums you have to pay. Typically, one of the basis in calculating life insurance is the number of people depending on your income. Starting it early gives you the opportunity to lock in the best rates than if you wait for at least a couple years more.
Additionally, entering marriage means sharing your responsibilities with your spouse. Should you pass away unexpectedly uninsured, you are also passing along the financial burdens to your bereaved spouse. Getting life insurance early on your marriage gives you and your spouse the peace of mind that finances will still be in order.
Expanding your family means an increase in expenses. Each child can cost a lot. If you die without insurance, your spouse would have to bear the struggle of single parenting, along with the financial obligations that come with raising a child. He or she will have to provide for the child’s food, shelter, education, and other basic needs.
Life insurance becomes even more essential when you have other people depending on your income for their survival. With life insurance, your children enjoy the same level of comfort and amount of opportunities, as if you’re still there.
Getting a house
Getting a house is a huge, long-term financial commitment. It’s also one of the most significant expenses in your budget. Having life insurance, in essence, also protects your home as one of your life biggest investments. If you get sick, or become disabled or even pass away unexpectedly, your family could also lose the home you’ve worked so hard to pay for.
Life insurance is an excellent way to get your family stay in your property even after your passing. Your family would bear the brunt of the financial obligations you leave behind, but with insurance, they’re likely to survive your loss and still live a comfortable life.
Landing a job
Landing a job is one of the best experiences in your adulthood. You’re now enjoying a steady stream of income, giving you more financial capabilities and opportunities you’ve never had before. Your job, importantly, supports and sustains your family’s lifestyle.
But you could lose your job any time, or you could pass away at any moment, and that can leave your family financially vulnerable. Your workplace may offer a life insurance policy as part of your benefits, but you’d still want to check if you’re adequately covered. Sometimes, life insurance through work isn’t enough, and you may need to purchase a more comprehensive one that matches your needs.
Factors In Calculating Life Insurance Needs
One of the best ways to calculate your life insurance needs is to base it on your income. Many people follow this rule of thumb: multiply your income to a certain degree, say five or ten times, and that’s how much life insurance you should get. Additionally, you may also come up with a multiple in mind plus your household debt (mortgage, car loans, etc.). Or you could work with a multiple of your income and add in $100,000 for each of your children.
Whichever method you choose, it helps to keep in mind that you can opt for a lower multiple if you have more assets and fewer liabilities, and settle for a higher one if you’re bound to leave behind several obligations.
One of the biggest factors that affect life insurance is your age. You may think that you can purchase life insurance any time, but if you’re looking for the best rates, you need to consider getting one as early as possible.
Life insurance premiums are typically cheaper if you purchase them early. And as you age, the rates also increase. So if you start paying life insurance at an earlier age, you’re likely to get the desired coverage with possibly lower rates. For instance, a healthy person who purchased life insurance at the age of 45 would pay less than another healthy person who started paying at the age of 47.
Another age-related factor that affects insurance premiums is your health. As you age, the less healthy you tend to become. Some insurers disqualify people who have health conditions, so you’re on a much better position to start paying for life insurance while you’re still young and healthy.
Bear this in mind: the more you wait to purchase life insurance, the higher rates you have to pay. You may still be able to get life insurance even at an old age, but expect to pay higher premiums.
Debt is another important factor when calculating your life insurance coverage. When you die, you don’t want your spouse and children struggling to pay the debts you’ve left behind.
Ideally, your insurance policy should be able to cover all of your debts, including mortgage, credit card debts, car loans, personal loans and more. For instance, if you have $200,000 more to pay on the mortgage and $10,000 for all of your loans, then your policy should be at least $210,000 in coverage. You also want to make some wiggle room for interest as well.
It is especially crucial to take a policy that covers all of your outstanding debts if your spouse co-signed for it, like a home loan. He or she will become responsible for the remainder of the payments, and it can be financially stressful for him or her. Additionally, make sure to cover debts that are anchored on collateral, like a car or a home, or these possessions might get seized, and your family is forced to live without.
If you are the family’s primary breadwinner, then it goes without saying that you need life insurance. Now, you may start to wonder whether it’s a wise idea to buy life insurance for other family members, say your kids and spouse. The decision is totally up to you, but you must consider first that insuring others can cost you some money.
The first thing you need to keep in mind is that life insurance is more necessary for people who bring food to the table than others who don’t. If you and/or your spouse are earning an income, and your children depend on it, then it’s right to take life insurance for both of you. When one or two of you dies, your deaths can mean a financial loss to your children.
On the other hand, it is unnecessary to insure your children because you don’t depend on their income to live. Their loss would surely be devastating, but kids cost money rather than bring in money.
On the other hand, you may want to get insurance for your kids, and other family members to avail other benefits, like coverage for when that person falls severely ill with cancer, brain damage or another serious condition or become disable. The insurance will also provide coverage for funeral expenses should the person passes away. You need to determine the appropriate coverage amount because most insurers inspect your relationship with the person and whether or not you’ll suffer a real economic loss if such person dies.
The amount you pay for life insurance also depends on how much your dependents may need to sustain their living at the time of your passing. In most cases, dependents include a non-working spouse and children. However, you may also declare your senior parents and other family members as dependents particularly if they depend on your income to live.
But what if you have no dependents? For instance, you are single, have no kids, and you don’t have to support your parents. Do you still need life insurance? The answer is yes because when you die, someone has to pay for your final expenses ultimately and your life insurance will ease out that financial burden from that person.
There’s a particular type of life insurance that specifically covers for your final expenses, called final expense life insurance and burial insurance. Your beneficiary will gain immediate access to the funds when you die, and it shall be used to pay for funeral-related costs.
Funeral costs in the country can get expensive, ranging from $5,000 to $25,000. Getting final expense life insurance will help alleviate your family’s financial stress, allowing them to lay you down in peace without going into debt.
Sure, final expense life insurance does not sound exciting, but it’s also an essential part of financial planning.
Financial cushion for your family
You may purchase life insurance on your name, but the ultimate goal is to provide a financial cushion for your family when you are gone. It’s sad to think that your family may get ridden with debts and financial obligations when you die, plus, they’ll need the finances to cover their day-to-day living. Your loss won’t just be devastating on an emotional level, but also financially.
Think of life insurance as your family’s security blanket. While they won’t be able to replace the income you’re used to bringing into the household, an adequate life insurance policy can. So when you’re calculating the needs for life insurance in this aspect, think of how much your family will need to sustain and thrive even without you.
Life insurance acting as income replacement, not only do you need to factor in how much they need for daily living, but also long-term. Will it be enough to cover the college costs of your children? Did you factor in inflation? Will your spouse not be left in debt?
How much you need to cushion your family when you die financially is a case-to-case basis. One person may need less life insurance if he has lesser debts and the dependents are older. On the other hand, you may need better coverage if you have younger dependents and more outstanding debts.
Cash value vs term
Finally, you need to decide between cash value and term life insurance. Cash value like whole life insurance and universal insurance provides coverage for the rest of the policyholder’s life. The phrase “cash value” applies to the savings component of the insurance which the policyholder can use for a variety of purposes, such as paying down debts, increasing savings and paying for premiums.
The advantage of having cash value life insurance is that it provides more comprehensive coverage. The cash value also grows over time, and it’s tax-deferred. With cash value insurance, your family gets permanent protection while the cash value accumulates. On the downside, you’ll have to pay more in premiums for cash value insurance than term insurance.
Meanwhile, term life insurance applies to insurance that’s applicable within a specified term or time frame. If you die within that term, your beneficiaries will receive the payout. In case the term expires, and you still want coverage, you may renew the insurance for another term, switch to a different coverage or drop the term altogether.
Ideally, the term you pick will match the succeeding years that you’ll be paying bills and your family still needs your financial support. For instance, you can choose a term that covers the years while you’re still in school, you’re still paying mortgage or while still building a solid nest egg.
How much life insurance can you afford?
It would be nice to have life insurance in place, even if you wish you and your family never to wish to use it. Nobody likes to think about death, but it’s also sensible to think about how your death might impact the lives of those people you love.
Now that you know that you need life insurance, the next thing you need to decide on is how much life insurance you can afford. You wouldn’t want to spend on life insurance more than your budget permits, although you can make budgetary adjustments in some spending areas to afford the premium that you’re after.
Apart from the budget, you also need to have a solid financial commitment to the policy because it will be a long-term one. When you miss your payments, you run the risks of having the policy terminated and will render the insurance useless in times of need.
It is always better to pick a policy that you can afford right now while allowing your family to live as comfortably as possible. Don’t take on higher insurance premiums that will eventually deprive your family. It is wiser to have affordable insurance in place that provides adequate coverage than spending too much that you’re running on a financial deficit, or worse, having no insurance at all.
Cary Silverman is a consummate entrepreneur having sold multiple companies during his 20 years of business experience in the financial industry, but for him, it isn’t about the money. His success is rooted in his passion to focus on doing something better today than it was done yesterday. These days, he’s the CEO of Waldo General, Inc. that oversees the operation of King of Kash.