Posted July 16, 2013 | Filed under topic Life Insurance Buying Tips
How much life insurance is needed is always a difficult question to answer because of the many variables that impact the final figure. People generally first purchase life insurance when they get married or live together. They also need it when they get a mortgage, have a child, or start a business together.
You have to ask who needs to be insured – just you or you and your spouse. Then, how much money does your family need after you or your spouse dies? Do you have children? How old are those children? Do both spouses work outside the home? What debts do you now have? How many assets do you now have?
Some experts say you need 7-20 times your salary, but that does not take into consideration specifics to your family, or inflation (figure 4% per year), or growing needs as your children mature.
There is a formula to help find how much life insurance is needed: current and future financial obligations minus existing resources (including survivors earnings, savings, investments, and life insurance you already own) = amount of life insurance needed.
If replacing a spouse’s salary, remember to include the cost of benefits that will need to be replaced, such as health insurance and contributions to a retirement account. Do not forget to cover funeral expenses, too.
Social Security helps replace some of the lost income – as of now. But the future of that program is more in doubt today than ever.
Another consideration is whether or not you need life insurance on your children. Experts are all over the place on this subject, but the fact is only about 15% of people under 18 have life insurance, and the average amount is only about $5,000.
When buying for children, the probable best choice is term insurance – enough to cover the cost of a funeral.
However, some people choose to buy the type of life insurance that the child can later take over and expand into a much larger sum without medical testing.
When it is all added together you may find that the amount of life insurance needed is quite large, but can you afford to be insurance poor in the meantime? Probably not.
The best approach is to find a trusty agent and go through your situation with that person, taking all of the aforementioned factors into consideration.