In our last article, we discussed many aspects of personal financial planning. One of the biggest components of personal financial planning to consider is insurance. And within the realm of insurance, planning for your life insurance coverage is one of the most important decisions you can make. Have you asked yourself recently “How much life insurance do I need for my family’s future protection”? Understandably, this is something that can be very daunting for many people to think about.
We realize no one can perfectly calculate how much life insurance they need to purchase. However, there are ways to get ahead of the game and make an educated estimate. The importance of thinking about which policies are best for your family earlier than later cannot be overstated. Taking these steps now will ensure that your loved ones are taken care of in the years to come.
In this article, we will review:
- what exactly life insurance consists of and who needs it
- the different types to choose from
- what life insurance typically covers
- general guidelines to keep in mind when considering purchasing a policy
- tips for calculating how much you will need
What Are the Types of Life Insurance?
Essentially, life insurance is an agreement into which the insured party and the insurance company enter, in which the family of the insured party receives a specified amount of money after their death. The point of this is, of course, that the family and loved ones of the insured party can have financial security and peace of mind after they pass.
There are two overarching types to choose from: whole life policies and term life insurance.
Whole life policy
Whole life policies are a permanent form of life insurance. This is where all the insured party has to do is keep paying their premiums and they are set for the rest of their life. Some forms of whole life policies also offer the opportunity to use your policy as an investment tool.
Term life policy
Term life policies instead covers the insured party for a set number of years, usually dependent upon your age and how long you are seeking coverage for. If you need to renew your policy after a set amount of years, some policies require that you obtain a medical exam first. Typically term life insurance offers lower premiums than whole life policies.
Determining Life Insurance Policies for Your Family
Now we will discuss who typically seeks out life insurance. Plus, how they might decide between the various policies available.
First of all, life insurance is not necessarily for everyone. Someone single and financially stable with no dependents may not need to purchase this kind of insurance.
Or if you do have dependents, but perhaps you have enough assets to take care of your funeral expenses, estate, attorney, and other legal fees — as well as a cushion to provide for your dependents after your death. In this case, you may not want to bother with this kind of investment. In our experience though, few people fall into this latter category.
However, even if you are financially well off, most folks are still interested in purchasing life insurance. They want to be extremely certain that their loved ones and dependents will not have to worry for their future, or even for any expenses that may arise as a result of their death.
Life insurance can be especially appealing to people with significant credit card debt, student loans, or who are the sole provider for their dependents. Co-signed debts such as student loan obligations can sometimes follow your loved ones after your passing. Hence, having invested in a policy may help ensure that you won’t be saddling your family with your debt after you pass.
When Should you Get Life Insurance?
One aspect of purchasing life insurance that can be very confusing to people is when to get it. It is indeed cheaper to purchase life insurance policies when you are younger. But this does not mean that you cannot purchase them when you are older, or even that it becomes impossible or prohibitively expensive to do so.
Another important distinction to understand is that it is not necessarily easier to qualify for a policy when you are younger. As such, insurance companies are almost always more than willing to cover anyone who can pay the premiums for their age and risk group.
Factors to determine how much life insurance you need
Now for the real question everyone wants an answer to: How much life do I need?
There is not, of course, a one-size-fits-all answer to this question. The amount of life insurance that you will need is entirely dependent on several factors, which we will delve into shortly.
The general rule of thumb is that you want to purchase somewhere between 10-15 times your annual income in life insurance coverage.
After all, the main purpose of life insurance is usually to provide your loved ones with a replacement for your income.
Income and inflation
So, let’s work off of the assumption that you are looking to purchase 10-15 times your annual income with your policy.
Of course, you will want to account for inflation as well. Luckily, there are many useful insurance calculators online that can help you with this. Figuring out this desired face value of your life insurance policy is an important first step. Plus, it will allow you to have more information while continuing your search for the best policy.
Another major factor to take into account is how much debt you have.
Do you have large and outstanding debts such as student loans, credit cards, mortgages, etc? You will definitely want to ensure that your policy includes enough money to pay these off in full. Otherwise, you are saddling your loved ones with having to pay these debts after you pass. Again, when calculating the amount of life insurance you will need be sure to factor in interest.
The third major factor to consider is the other people that you are seeking to take care of with your policy.
It can be a little sticky figuring out who exactly needs to be taken care of with the policy you choose. But the general rule is that you should only worry about people who would be adversely affected financially by your passing.
Have Confidence in Your Family’s Future
Life insurance can be an emotional and complex topic but is well worth spending time and energy discussing. Being diligent in figuring out exactly what you need in a policy — with the help of a family financial planner — is an important and worthwhile investment.
The end goal is to ensure that your loved ones are cared for and your financial obligations are in order, even after your passing.
Let Our Experience in Personal Finance Guidance Help Your Family
Finding a financial advisor who takes the time to get to know you and treats your financial decisions with respect is the wisest move you can make.
Schedule a meeting with us here to learn more. We look forward to discussing your goals with you.