How Much Life Insurance Coverage Do I Need?
Life insurance is supposed to make things easier for those you leave behind. It's designed to help pay for your final expenses, pay off your loans, make sure your children can go to school and help your family survive without your income. But how much insurance coverage do you need to have to make sure all of that is paid for?
Reasons For Coverage
The most common reasons to obtain life insurance are to cover the costs of:
- Funeral Expenses: Life insurance can pay for a funeral and burial and related expenses. Experts recommend budgeting for approximately $15,000.
- Loans: Life insurance can pay off debts such as mortgages, car loans and student loans so that loved ones do not have to carry the burden of these expenses. It is up to the insured to decide how much coverage to buy based on the amount of debt versus what a surviving spouse will be able to afford. There are online calculators to help with decisions about insurance coverage.
- Education: Life insurance can help pick up the cost of college education. Keep in mind that economic experts advise that the cost of college will increase about 5 percent each year so make sure to take this into account when calculating how much coverage you will need.
- Income Replacement: While your dependents may need supplemental income from life insurance to make up for your lost paycheck, they won't need 100 percent of your salary if debts, loans and educational expenses have all been handled.
How Much Insurance Do You Need?
There is no hard and fast rule for the dollar amount of insurance coverage each person needs because life circumstances differ greatly.
Many financial experts suggest coverage worth five to ten times your annual salary. Someone with no dependents might need a lot less insurance. Someone carrying large amounts of debt may need more.
Some financial advisers also believe in minimal life insurance coverage for the person who is not the primary earner in the family. It's important to remember that life insurance isn't strictly about income replacement. A stay-at-home parent may not be bringing in a paycheck that needs to be replaced, but if he or she died suddenly and the primary earner had to hire a housekeeper and pay for child care, the family's expenses would rise considerably.
When You Might Need More Insurance
Some life events may trigger the need for more life insurance. Kiplinger's financial data service notes that the following life events may warrant an increase in life insurance coverage:
- Getting married
- Having a child
- Buying an expensive home
- About to retire or leave your job - Many companies provide life insurance policies for their employees. Losing the company policy may leave a void that a personal policy must fill
Term Vs. Permanent Coverage
Term life insurance is the most basic form of life insurance. Term life policies are purchased for a set period of years. The policy expires at the end of the term whether death benefits have been paid or not. Families with small children often select term insurance policies for the number of years that those children will be dependents. Additionally, policies offered by employers are generally term insurance.
Permanent life insurance provides coverage for the lifetime of the covered individual. Because it does not expire, permanent life insurance is generally more expensive than term insurance. Additionally, permanent life insurance has an investment component to it which can fluctuate in value. The investment component can include stocks, bonds or money market funds. Many permanent policies will allow you to borrow against the value of the investment component.
Buying Life Insurance
The process of acquiring a life insurance policy requires a paperwork trail and patience. Providers generally require a medical exam before writing a policy. The exams are usually done by medical professionals who provide mobile services and meet clients in their home or office. The medical professional usually asks general health questions. The exam can often include blood work, urine samples and sometimes more sophisticated tests like EKGs and x-rays.
Providers look for markers of unhealthy lifestyles like tobacco or illegal drug use. They also want to pinpoint any conditions that could affect your life span.
The larger the policy and the older the applicant, the more tests they are likely to require.
Additionally, insurance companies share information about medical histories through a national clearinghouse.
How To Choose A Provider
There are many insurance companies underwriting life insurance policies. They offer different amounts of coverage at different prices. Providers also differ in the amount of fees and commissions they charge for a policy. Therefore, it makes financial sense to get more than one quote on a policy.
You also want to make sure you have selected a financially healthy provider for your coverage. After all, a life insurance policy is worthless if the company you have it with goes out of business. Standard & Poor's rates providers that offer insurance services on financial stability and the ability to payout policies and contracts.
Life insurance is an important part of estate planning. It's a way to make sure that your finances are in order and your death does not cause undue financial hardship to your family. Insurance comes in different forms and in different amounts. Selecting the necessary coverage requires a long, hard review of your expenses and debts and a practical view of how much money those you leave behind will need.