How Much Life Insurance Should I Have?

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There is no simple answer to the question “How much life insurance should I have?” The amount of life insurance needed varies during a person’s lifetime and between individuals and families. The factors to consider when selecting a death benefit amount are current income and investments, outstanding debts, number of dependents and future financial goals, including retirement.

More specifically, family’s should have a death benefit between 5 to 10 your annual income, and policyholders should account for mortgage payments, credit card bills, medical bills, funeral expenses, children’s education and tuition costs, and a retirement package for your spouse to cover daily living expenses. Using different types of policies, such as term, whole, universal, and variable coverage, can give individuals and families greater flexibility when determining the amount you should have.

LI - Life Insurance Needs

Young Singles

Many young, healthy single people do not believe they need life insurance, but young people often start out with substantial debt from student loans, car loans and other major purchases, even mortgage loans. How much life insurance a single person needs is based on the total amount of outstanding debt plus $10,000 to cover final expenses, such as medical bills and funeral expenses. This is because existing family members may have co-signed on a loan with their children and could be liable for any outstanding payments or the loan balance if the individual dies.

Additionally, young singles should think about future financial goals and consider buying permanent whole life insurance when they are young, healthy, and premiums are cheapest. Buying coverage at a young age can help individuals start saving early and accumulate wealth over time.

What If My Needs Change?

Your life insurance needs will change over the course of your lifetime. One way to deal with changing circumstances is to buy a whole life policy when you are young and supplement that policy with term protection, when necessary, to cover new debts, loans or financial obligations. Whole insurance policies are permanent and accrue a cash value over time that can be used to meet financial goals. Temporary term life policies can provide extra protection as needed.

How Much Should A Working Parent Have?

Wage earners with financial dependents not only need enough life insurance to cover their debts and final expenses, but they need to provide for their surviving dependents, including spouse, children, and may even their own parents. Financial planners or advisors and insurance experts generally recommend that wage earners have a minimum amount that is equal to 5 to 10 years of income, but the bottom line is to buy coverage that you are comfortable with.

Temporary term life insurance is a good choice for wage earners with dependents since the need for additional protection is highest when your children are born and gradually diminished as they become independent, graduate school or college, and begin to live on their own. For this typical situation, a 20 or 30 year term life policy is best because rates are very cheap, the policy provides coverage when you most need it, and then expires as liabilities begin to decrease.

How Much Does A Stay at Home Parent Need?

Even though stay-at-home parents may not earn a wage, they contribute valuable services to the household, including child care, laundry services, cleaning, meal planning and preparation, and shopping. Couples with children should consider how much these services would cost if the parent was no longer there to perform them. Once an annual figure is reached, multiply that amount by between 7 and 10, depending on the ages of the children.

Why Do Seniors Need Policy Coverage?

Most seniors have paid off their debts in preparation for retirement and do not have dependent children, but they still need life insurance. A senior’s needs depend on their financial circumstances. For seniors with a modest estate, a $10,000 term policy is usually enough to cover final and medical expenses. More affluent seniors may choose to carry enough life coverage to pay estate taxes for their heirs since the proceeds are not taxed, and can be used to pay off any taxes charged by the government when the estate changes hands to the heirs.

Covering A Mortgage

A home is the biggest purchase most families ever make, so it is important to ensure that the mortgage will be paid if a wage earner dies prematurely. The amount of money an individual needs to cover the balance of a mortgage decreases over time as payments are made. For debts like mortgages, there are policies called decreasing or mortgage term life insurance.

For these types of policies, the premiums and death benefit are not fixed and decrease over the term period as the debt is paid and decreases. This is extremely beneficial because, as the death benefit decreases to cover only the remaining portion of your mortgage, your rates also decrease because you do not need as much coverage each month. Decreasing term life insurance helps people avoid paying for more than they need.

Decreasing term is also used by banks and financing companies when entrepreneurs/business-owners are financing deals and the lender wants a personal guarantee to ensure payment of the business or commercial loan.

Why Buy A Policy For Your Children?

There are whole life policies called endowment policies that are perfect gifts for newborn children. An endowment policy is a type of limited payment whole insurance that accrues cash value as a child grows. When the child reaches 18, 21, or 25, they can redeem the cash value of the policy to help pay expenses like college tuition, a car loan, or a down payment on a house, or they can convert the endowment policy into traditional whole life policy with low premiums. The death benefit or amount of protection a parent or grandparent should buy for a child depends on their financial circumstances and how much money they went to offer the child when he/she grows up. Whole life insurance for children can almost be compared to a trust fund in many aspects.

As An Investment

Permanent policies like whole and universal life insurance can play an important role in financial planning. Life insurance as an investment for an individual depends on their financial goals. Permanent coverage is a long term investment that is great for retirement planning or saving for a child’s education. Few investments offer the security and stability of whole life and its ability to produce a guaranteed rate of return; meanwhile, universal life insurance offers greater risk for greater returns by investing in the stock and bond markets. Since interest and dividends are tax-deferred until they are removed from the policy, your investment will continue to grow quicker and larger faster, making the tax advantages very attractive.

As A Tax Shelter

A single payment whole life makes an excellent tax shelter for older, affluent individuals. The cash value is fairly liquid and can be withdrawn or used for security for no- interest loans. Since loans are not considered income, no taxes are paid and there are no repayment terms on loans. How much single payment life insurance an individual buys depends on how much money they want to put in a tax-free investment for retirement.

What Kind Should I Buy?

Since permanent policies have fixed death benefits, individuals cannot adjust the policies to meet their changing needs. For many people, the answer is to supplement permanent protection with temporary term policies. Young singles and retired seniors need less than couples with dependent children, a mortgage, credit card bills, and tuition costs.

Compare Coverage, Companies, and Premiums

Hopefully throughout this article, we’ve provided you some ideas, suggestions, and factors to consider when determining the details of your life insurance policy. How much you need depends on your current and future financial assets, liabilities, and goals. The next step is to actually get a life insurance quote so potential policy holders can determine the cost of their policy.

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