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How Much Life Insurance Do I Need?
Possibly the most often asked question about life insurance is “How much do I need?”
Life insurance helps ease the burden that your death puts on your family and provides income for their future. When that happens, you don’t want to make the situation more difficult for your loved ones than it already is. Life insurance helps you take care of your family even after you are gone.
Reasons You Should Have Life Insurance
The loss of a family member — particularly main income provider— can significantly impact the financial status and trajectory of a family. You don’t want to cripple your family financially when they’re also trying to come to terms with your loss.
Why have life insurance?
- Your funeral will cost your family more than they can afford.
- You have a significant amount of debt that someone else will inherit upon your death.
- Your partner and/or children heavily depend upon your income.
- Your children’s college savings
- You have a large estate that will incur exorbitant estate taxes when it passes to recipients.
If any of these situations describes you, you’ll want to consider life insurance, even if it’s a low-cost, minimum-coverage policy.
What is life insurance?
The first step in determining how much life insurance you need is ensuring you properly understand what life insurance is and how it works. Essentially, in exchange for your premium payments, the insurance company will pay a lump sum, known as a death benefit, to your beneficiaries after your death. The funds your beneficiaries receive from the policy payout will help them pay their living expenses, cover the cost of your funeral, or make necessary life changes after your departure.
What are the types of life insurance?
There are two types of life insurance: term and permanent. Term life insurance is the most common and typically the more affordable option, providing coverage for a set period of time, such as 10, 20, or 30 years. Your family will receive a payout if you pass doing that set time period. If you pass away after the policy expires, your family won’t receive a payout. Most people will pay the policy through that time period and then get a new policy with a new term. Each time you get a new policy, your premiums will be more expensive, as you are older and possibly less healthy.
Permanent life insurance, meaning you’re covered for life as long as your premiums are paid, can be used for the same purpose, but many permanent policies allow the owner to accumulate a cash value that they can borrow against. It’s more expensive than term policies as a rule not only because of the cash value but also because it will cover you when you are older too. Also, you don’t have to worry about qualifying for life insurance again as you get older.
How Much Life Insurance Do You Need?
Generally, if you are the primary source of income for your family, the rule of thumb is 10 times your annual income. While this rule is helpful, it doesn’t take a detailed look at your family’s needs, nor does it take into account your savings or existing life insurance policies. And it doesn’t provide a coverage amount for stay-at-home parents, who should have coverage even if they don’t make an income.
Two examples of how to manually calculate how much life insurance you need on more detailed financial obligations minus liquid assets are below.
For working adults, add up years of income, debts, and future expenses, while subtracting current savings and life policies to calculate your financial obligations based on your life.
Your Financial Obligations = Annual salary x (Number of years of income you want to replace) + Any debts, including your mortgage balance and credit cards + Any future costs, such as college fees, retirement savings, and funeral costs - Any savings, existing college funds, and current life insurance policies
For stay-at-home adult, the value of adult’s work at home needs to be replaced if he or she dies. At a bare minimum, the remaining parent would have to pay someone to provide the services, such as childcare, fixing or carry-out meals, cleaning, laundry, etc., that the stay-at-home parent provided for free. Also applicable debts and future expenses should be added to the total.
These calculations may suggest a higher life insurance coverage than simply multiplying your income by 10 years. If you’re unsure how much life insurance you need based on your own situation, speak with an Alabama ONE Insurance agent*. They can provide insight to help you decide which policy and amounts are suitable for you and your family.
*The insurance and related products offered are not deposits, obligations, federally insured or guaranteed by Alabama ONE Credit union. Rate quotes are not guaranteed, and each insurance is based on individual circumstances.