The discussion of life insurance is not one that many people enjoy having, however, it is a critical part of your life and legacy. You want to feel confident that your loved ones are taken care of in the event of an unexpected death. If this unfortunate event happens, they will be grateful you took time now to set them up for the future. But as you begin to plan, it can be confusing to know how much insurance is the right amount for you. Let’s discuss the key factors to look for as you determine the coverage that’s right for you.
The amount of life insurance coverage you need depends on your current life situation, including your income level, expenses, debts, and the number of dependents relying on you. In general, life insurance is necessary if there will be a financial burden left by your passing, or if you would like to use it as an inheritance vehicle. For those with limited assets and debts and no dependents or heirs, life insurance is less important.
Life insurance is meant to replace the earning potential lost when you pass away, which means the higher your income level, the higher insurance coverage you’ll need. Similarly, if you have higher expenses or large outstanding debts (like a mortgage), you’ll want to purchase at least enough insurance to cover these liabilities.
Next, consider any dependents who may be relying on you. Do you have a spouse or children? Does your spouse work? How long will they need financial support in your absence? Do you plan to pay for your children’s college education? These are all questions to consider when determining how much life insurance you need.
Let’s take a look at the most common rules of thumb for calculating your coverage level, keeping in mind that each person’s situation is unique and it’s always best to work with a financial professional before purchasing an insurance product.
This rule suggests you should have life insurance coverage equal to 10 times your annual income. For example, if your annual income is $75,000, you should have $750,000 in life insurance coverage. This rule of thumb jumps to 20 times your annual income if you have young children or a dependent spouse.
This rule suggests you should consider four factors when determining the appropriate amount of life insurance coverage: debt, income, mortgage, and education. Add up your debts (like credit cards, auto loans, and personal loans), multiply your annual income by the number of years you want to replace it, add the amount of your outstanding mortgage, and add the cost of your children’s education. This will give you a rough estimate of how much coverage you need.
This method involves a more comprehensive evaluation of your financial needs. It takes into account factors such as your current and future income, your debts, your children’s education, and your retirement savings. A financial advisor can help you with this analysis and determine the appropriate amount of coverage for your situation.
After you have a general sense of the coverage level you need, it’s important to understand the types of life insurance available.
Term life insurance is typically less expensive than other types of insurance. It provides coverage for a specified period of time, usually 10, 20, or 30 years. But the use-it-or-lose-it nature of a term policy is a big drawback. If you pass away during the specified term, your beneficiaries will receive a death benefit; but if you don’t die during the term, the policy expires and you get nothing. All the money you spent on premiums will be gone too.
Because term life insurance is one of the least expensive and simplest types available, it’s typically recommended for those who only want coverage for a specified period of time, like until your kids reach a certain age or your mortgage is paid off.
Permanent life insurance is more expensive than term life insurance because it covers you for your entire life. As long as you pay the premiums, your beneficiaries will receive a death benefit when you die.
Permanent life insurance also has an investment component known as cash value. This cash value grows over time and can be used to help pay premiums or it can be borrowed against in case of an emergency. There are two main types of permanent life insurance: whole and universal.
These are just a few of the important factors to consider as you navigate all the options for life insurance—and there are many more options that can make the whole process a little confusing. This is why we encourage working with a financial advisor that can help you understand all the intricacies of life insurance. Working with an advisor is valuable to get started, but can also assist you in adjusting your plan as life changes throughout the years.
At Wealth Advocate Group, we believe strongly that you deserve someone to advocate for you and your loved ones. It’s our commitment to getting you the best information and helping you find the plan that fits your specific situation. Call 440-505-5704 or email jbrown@Wadvocate.com to schedule an appointment.
John Brown is a wealth advisor at Wealth Advocate Group, LLC, an independent, fee-based wealth management company. With over 10 years of experience in the financial industry and a background in accounting, John provides sophisticated and specialized services to his senior executive clients who need the expertise of someone well-versed in concentrated securities and restricted stock strategies, as well as the risk and tax burdens that come along with their compensation. John has a bachelor’s degree in accounting and financial management from Hillsdale College and is a CERTIFIED FINANCIAL PLANNER® professional. John is known for his thorough approach, often asking questions and bringing up details his clients have not considered. He strives to address every piece of his clients’ financial picture to make sure they are on the path toward their goals and financial confidence. In his spare time, John and his wife, Christina, enjoy traveling and staying active. You can often find him spending quality time with his friends and family. To learn more about John, connect with him on LinkedIn.
This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. Guarantees are based on the claims paying ability of the issuing company.
Variable Universal Life Insurance/Variable Life Insurance policies are subject to substantial fees and charges. Policy values will fluctuate and are subject to market risk and to possible loss of principal.
