The recent economic recession demonstrated to many people how uncertain their financial future can be, regardless of how many assets they have. Considering this, it’s no wonder that more and more people are becoming interested in different types of insurance, including life insurance. According to the Insurance Information Institute, the total amount of life insurance premiums in the US has increased from $100.3 billion in 2010 to $130.6 billion in 2012. Despite these figures, many people still believe that this type of insurance isn’t for everyone and have not purchased life insurance.
Do You Need Life Insurance?
Buying life insurance probably doesn’t make sense if you have no dependents. However, many young people mistakenly believe that they don’t need this type if insurance, even if they do have dependents. The reality is that anyone can die suddenly as the result of an accident or unidentified medical issue, and qualifying for insurance gets more and more difficult as you age. Insurance premiums are much cheaper for young individuals than for older people.
So, who needs life insurance? Simply put, anyone who has dependents he or she wants to protect in the event of a tragedy.
How Much Insurance Do You Need?
The amount of insurance coverage you should get depends on how much money your dependents need if something happens to you. In order to choose the right insurance policy, consider the following points:
- Debt: Since debt must be paid off in full, it’s essential to check all your loans, including mortgage, car loan and credit cards, prior to choosing your insurance policy. For instance, if you have a $4,500 car loan and a $150,000 mortgage, you need at least $154,500 in your policy to cover your debt. It’s advisable to choose a policy that offers you a little more in order to make sure that medical costs, funeral expenses, taxes and other financial obligations will be completely covered.
- Future Obligations: Considering future financial obligations is very important before opting for a specific life insurance policy. If, for instance, you want to cover your children’s college tuition, you should estimate the total cost and add it to your policy. Additionally, if your spouse doesn’t work, a good idea would be to choose a policy that covers your income. If you have a yearly income of $50,000, and you want to make sure that both children will go to university and your spouse is able to cover the $150,000 mortgage after you’re gone, you should opt for a policy that ensures a minimum payout of $935,000 ($625,000 to replace your yearly income + $160,000 university expense + $150,000 mortgage expense). Once you determine the amount of coverage you need, you can start shopping around for the best deal.
- Income Replacement: If you’re the only provider for your family, you have to make sure that your insurance policy payout not only replaces your income, but also includes inflation. For example, if you have a yearly income of $50,000, you’ll need a $625,000 policy only to replace your income. To cover inflation as well, add your yearly income one more time to your policy, which will now offer your dependents $675,000. Although this isn’t a set rule, adding your yearly income once again to your policy is a good way to guard your family against the possible effects of inflation.
Besides considering your current and future financial obligations, you should check your existing resources, such as your savings, investments and dependents’ earnings. After subtracting these resources from the total amount previously calculated, you’ll be able to determine how much life insurance you actually need.