If you’ve been reconsidering your need for life insurance or wondering if the coverage you have is enough, you’re not alone. According to LIMRA, nearly 30% of adults are more likely to buy life insurance over the next year who wouldn’t have been inclined to do so before the pandemic. But we know that looking for life insurance comes with a lot of questions. The first one is usually: how much life insurance do I really need? Keep reading to find out what factors to consider when you’re deciding how much coverage to buy.
First, consider what life insurance could pay for.
Research done by LIMRA and Life Happens indicates that the number one reason people buy life insurance is to cover their funeral or burial expenses. But life insurance can cover many other things you may not have considered. Additionally, many people noted reasons for purchasing coverage including supplemental retirement income, transfer of wealth, money to pay off a mortgage, replacement of wages or income, home expenses, tax-advantaged investment, estate taxes, college costs, business purposes, and charitable gifts.
Get clear on all of your financial obligations.
44% of households would face financial hardship within six months if the primary wage earner passed away prematurely, and 28% would face it within just one month. It makes sense that income replacement and coveting expenses are high on the list of reasons to purchase a policy.
Start by getting a basic idea of how much life insurance you need based on covering your family’s expenses. Make a list of all of your financial obligations that would need to be covered in your absence, then subtract any existing assets that could be used toward those bills. This list might include:
Many people mistakenly think that they don’t need life insurance if they don’t have children or if their children are grown. However, your financial responsibilities fall to your family when you are gone. Life insurance can replace the income you would usually bring in and help support your spouse or adult children, ensuring your loved ones can maintain the lifestyle they’re accustomed to.
Mortgage, auto loans, and other debt payments
If you pass away, you don’t want your family to worry about being able to pay off your debts or stay in the family home once you’re gone. If your income replacement won’t fully cover these payments, make sure there’s extra money in the policy that will. Don’t forget interest when you’re making these calculations.
Protection for your small business
Many people overlook the number of complications and financial issues that can arise due to the death of a business owner. A life insurance policy can keep a business moving along after the loss of the business owner/partner. Key-person life insurance is payable to the company and provides money for the training and hiring of a new employee. A buy-sell agreement allows the other partners in the business to buy the deceased’s share of the business, which will provide money for his or her family.
What if your surviving spouse was relying on you to fund retirement for the couple? The premature death of an earner can affect sources of retirement benefits such as Social Security. Life insurance can help support a surviving spouse during their retirement.
Education and other child-raising costs
It costs hundreds of thousands of dollars to raise a child to age 18, with college tuition, fees, room, and board resulting in another potentially enormous expense. If you were to die tomorrow, would funds be available to provide for your child? Having life insurance could secure the future for your children if you have an untimely death.
Now you have an idea of the expenses you want to cover with your policy. Next, subtract any existing funds that could be used. This typically includes existing or supplemental life insurance – but be careful about including coverage from a job you might leave as it usually won’t go with you. It can also include any savings you already have set aside.
Getting the life insurance coverage you need
Now you’ve answered the question, “How much life insurance do I really need?” The next step is to find the right policy for you. There are multiple options to consider and what you choose will likely depend on the premiums you want to pay, your preference on things like flexibility when it comes to taking money out of the policy, and lastly, your age and medical condition. Read this article to find out more about the different types of life insurance.
Life insurance is complicated, but you’re not alone in figuring out what’s best for you. When you’re ready to get the right coverage for your family, we recommend talking with an independent insurance agent. An expert like the ones we have on our team at SBI can set you up with the right solution. We provide the comfort of knowing your family will be taken care of if anything happens to you. If you’d like to have a no-obligation conversation about your options, give us a call or fill out the form below. We’d love to help.