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One way to ease the burden that your death puts on your family is by having life insurance coverage.
It’s a sad truth that you — like everyone else — will die one day. When that happens, you don’t want to make the situation more difficult for your loved ones than it already is. One way to ease the burden that your death puts on your family is by having life insurance coverage. Here’s some advice for deciding how much life insurance you need.
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 is usually used in specific situations, such as when the owner wants to accumulate a cash value that they can borrow against. It’s more expensive than term policies as a rule. There are other advantages, such as you don’t have to worry about qualifying for life insurance again as you get older, which your agent can explain for your situation and needs.
Reasons why you may need life insurance
The loss of a family member — particularly one who’s the breadwinner — can significantly impact the financial status and trajectory of a household. You don’t want to cripple them financially when they’re also trying to come to terms with your loss.
Here are a handful of scenarios in which life insurance may be valuable to you:
- 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.
- You have a large estate that will incur exorbitant estate taxes when it passes to recipients.
- Your funeral will cost your family more than they can afford.
If any of these situations describes you, you’ll want to consider life insurance, even if it’s a low-cost, minimum-coverage policy.
How Much Life Insurance Do You Need?
Generally, if you are the bread-winner of the family, the rule of thumb is 10 times your annual income. but this 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.
The value of a stay-at-home parent’s work 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 child care, that the stay-at-home parent provided for free.
Here is way to manually calculate how much life insurance you need based on financial obligations minus liquid assets:
Step 1: Add up the following items to calculate your financial obligations.
- Your annual salary multiplied by the number of years you want to replace that income.
- Your mortgage balance.
- Any other debts.
- Any future needs such as college fees and funeral costs.
- The cost to replace services that a stay-at-home parent provides, such as child care, if applicable.
Step 2: From that total, subtract liquid assets, such as savings, existing college funds and current life insurance policies.
The number you’re left with is the amount of life insurance you need.
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 best for you.