When it comes to figuring out your life insurance needs, it might seem tricky and confusing. Well, it’s actually not about how much life insurance you need. It’s simply how much your family will need when you’ll no longer be with them. Here is a detailed guide on how much coverage to choose for your life insurance:
Determine whether or not you need life insurance
Generally, not every individual needs life insurance. For example, if you’re still young without any dependants, arguably there is no need for a life insurance. But if you’re planning to have dependents, it will be an imperative idea to get insurance when you’re still young.
Evaluate your family’s needs
Determine the amount of life insurance coverage you should carry using either the lump sum need method or the income replacement method. The lump sum need method will help you calculate the money needed to pay:
- Household expenses
- Outstanding debts
- Educational costs
- Funeral expenses
- Emergency needs
The other method calculates the amount you will need to replace a certain percentage of your income for a specific number of years, in most cases, until when your mortgage is paid off or when your youngest son/daughter gets out of college.
Calculate future spending
It’s very important to consider your family’s future financial obligations. You don’t have to commit all your income to buy a life insurance. But of course you should have enough coverage to pay for the future financial obligations. For instance, if you’re planning to help pay for college for your children, you can factor in pending tuition bill and fees. Outline your family’s cash-flow needs and financial goals. Sum up your income and that of your spouse and the figure out the estimated amount that your dependants would need. Now look at the amount of money that would be available. Basically, the difference between the available resources and your family’s financial needs will tell you how much life insurance you should carry.
Determine the type of insurance you need
When you’re figuring out to buy a life insurance policy, be sure to choose the right amount of coverage. It’s obvious that you may not want to have too much and pay for protection you actually don’t need. Neither will you want to have too little, leaving out some of your loved ones under protected. There are two basic types of insurance; term and cash-value insurance.
This type of coverage has no investment component. Well, it’s up to you to decide how much coverage you need and how long you want that insurance to remain in effect. You can obtain term insurance that has a level premium over the term of the policy. The good thing about Term insurance is that it has lower premiums compared to cash-value insurance. Most of the financial planners generally recommend buying this insurance and then investing the difference between a cash-value premium and a term-insurance premium. If you have kids, term insurance will provide you with the most coverage for the lowest premium.
Cash-value insurance is also referred to as permanent insurance. It can be one of the most confusing subjects when it comes to personal finance. Permanent insurance can be an excellent product; however, it’s a bit difficult to understand. Most of the insurance salespeople takes advantage of its complexity and go selling high-commission policies when in fact other policies would be more suitable.
If you choose coverage that you will pay annual premium of $10,000 or more per year, it’s very important that you consider retaining a fee-only insurance advisor who doesn’t have any financial stake in your decision. Having the advisors at your side can certainly save you far more than their fee. You will even feel more assured because their advice is objective and in your best interest.
Regular reviews on your coverage
Once you have the life insurance, don’t get tempted to stash the paperwork in your drawer and then forget about it. Make sure you regularly review the amount of cover you have so that it still offers enough protection when your circumstances change. For instance, you might have another kid, move to a bigger property, and get divorced, so you may need to reduce or extend your cover.
You should consider buying smaller, multiple life policies, instead of going for one larger policy, it will be easy to vary your coverage as your needs change.