There is no single answer to this question, but there are ways to measure how much coverage you need. First, it is important to think about the financial gap your family will have to bridge without you. Start by taking the amount of assets you have and subtracting your current financial liabilities; This equates to the minimum coverage you need.
What is the correct amount of life insurance?
According to CNN Money, the recommended rule of thumb for life insurance is to buy 7 to 10 times your annual life insurance income, but this doesn't take into account your unique financial situation. The best approach is to take the full value of your available assets and subtract your financial liabilities:
Current financial liabilities - Assets = Amount of coverage
The amount of coverage calculated represents the financial gap between your family's money and projected expenses. The document you buy must cover at least this amount. With term life insurance, you generally have a choice of coverage amounts ranging from $ 250,000 to $ 1 million. The amount that is right for you depends on your specific needs, your future goals, and your budget. Fortunately, finding the ideal level of coverage is easy.
What financial assets and liabilities should I consider?
Financial obligations to consider:
Financial obligation includes any debt or financial obligation for which you are responsible and owe to another party, such as:
- Your Mortgage: The money saved by life insurance can ensure that your family will continue to make the mortgage payments or pay off the entire mortgage.
- Loan Payments - This includes student loans, homeownership loans, and auto loans that your family will have to take care of.
- Credit Cards and Other Debt - Be sure to factor in any outstanding or anticipated debt, including medical or dental bills (especially if your children need braces).
- Ongoing Child Care Expenses: The average cost of raising a child from birth to 17 is $ 233,610. This does not include the cost of college, which ranges from $ 20,090 to $ 45,370 per year.
- End-of-Life Expenses - Funeral costs are typically around $ 10,000 or more, so it's important to make sure your family has enough funds to cover them.
- Antique Gift and Financial Pillow - While not a must, if you intend to leave something for your children, grandchildren, or a favorite charity, life insurance can help make sure the money is there. You can also simply add more coverage to save your family more.
Principles to consider:
An asset is anything of monetary value that you own, benefit from, or use to generate income, such as:
- Savings and Investments - Funds accumulated in your personal bank accounts, stocks, bonds, mutual funds, or any inheritance you have received.
- Retirement Savings - Money you invest for retirement, usually through an employer or other organization (IRA, 401 (k) plans, Social Security).
- Any current life insurance policy - Current policies that will be paid to your family if something happens to you
If something happens to you, it's critical to make sure your family has enough money to pay bills and keep up with basic living expenses. As long as you have an active policy, the beneficiary (or beneficiaries) listed on your life insurance policy will receive a one-time payment that they can use to:
- Replace your income
- Pay off a credit card or other debt
- Pay your mortgage payments
- Covering daily expenses
- Covering the costs of the cemetery and funeral
Other important factors to consider:
Here are some other situations and circumstances that can affect the amount of coverage you need and should be considered when purchasing life insurance.
Are you or your wife a stay-at-home parent?
If something unexpected happens to a stay-at-home parent, it may be necessary to pay someone to take care of daily tasks, such as childcare, meal preparation, transportation, shopping, laundry and more. In terms of coverage amounts, buying a policy roughly half the size of a co-worker's policy is a good option (most insurers will approve this amount based on the income of the working spouse).
Do you have a group coverage plan?
Some people have group life insurance through the company they work for. But in most cases, it is not enough to meet the needs of the average person. In fact, having just group life insurance results in an average $ 225,000 gap in needed coverage.
Some group plans give you the option to purchase additional coverage to supplement your policy. These supplemental plans generally allow you to buy coverage up to three to four times your annual salary. Keep in mind that most people change jobs throughout their careers, and in most cases, you lose coverage issued through your company upon departure.
How to balance coverage and costs
While it is important to buy enough life insurance, it is equally important that you only buy what you can. After all, the more coverage you buy, the more expensive your policy will be. While life insurance is much less expensive than most people think, there are a few things you can do to get the best rate.
- Don't wait to buy - it's better to buy sooner rather than later, because the cost increases every year as you get older. Also, if you have a medical condition, the coverage will be more expensive or you may not be eligible for any coverage. The cost of life insurance increases as you age, and insurance premiums increase at a rate of 8% to 10% annually. The smart move is to buy more coverage now if you think you'll need it later, so you can lock in a lower rate early on.
- Compare Quotes - This can help you find better rates for the same amount of coverage, so it's worth comparing prices or talking to an agent to get the best quote for your needs.
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