Life insurance isn’t something you usually think about when you are making a financial plan, but it is actually an important part of your family’s financial future. If something happens you want your family’s to be financially secure, but you may wonder how much insurance do I need? Although the answer to this question is different for everyone, there are some things you should consider that can help you decide.
- Remember what the purpose of life insurance actually is. Life insurance isn’t about making your family rich if you suddenly pass away. Instead, it allows your family to continue paying the bills and takes away some of the financial burden of you being gone.
- Determine how much you will need for funeral expenses. According to Kiplinger, a financial magazine and online website, the expenses for a funeral and burial typically cost between $10,000 and $20,000. As a rule of thumb, they suggest that you have at least $15,000 in life insurance to cover these types of costs. One of the reasons for this is because you can typically receive the money faster from a life insurance policy than you can by waiting on your estate to settle.
- Calculate the amount of debt that you have. You may realize that your family can handle some of the monthly debt if you are gone, but that they might struggle making a mortgage or car payment. This is the type of debt that you would want your life insurance to cover if you are gone.
- Consider where you are at in your life. Do you have young children that could need money for college? How close are you to retirement? If you have recently had a baby and your spouse is staying home to raise the child, the loss of your income could be devastating. If you are retired, your house is paid for, and your spouse receives a nice pension, you may find that your funeral expenses are the only concern that your spouse would have to worry about.
- Decide which type of life insurance you should purchase. Once you know how much debt you owe and how much money your family may need, you can then evaluate the different types of life insurance to figure out what type of policy is best for your situation. There are actually two different types of life insurance. Term life insurance and permanent or whole life insurance. There is also universal life insurance, which is a form of whole life insurance.
- Term life insurance is generally the cheapest of the three, but the policy only stays in effect for a certain number of years. It does not build cash value, but the premium does remain the same throughout the life of the policy. The actual amount of the policy remains the same as well. If you select a $50,000 term life insurance policy, your beneficiaries will receive a $50,000 payout.
- Whole life or permanent life insurance accumulates a cash value at a set rate. There are typically higher premium payments, but the insurance covers you throughout your lifetime. There may also be dividends paid out over time as the cash value accumulates. If you wish, you can then use these dividends to pay your life insurance premiums. The coverage on a whole life insurance policy never ends, however, you can cancel the policy if you desire.
- Universal life insurance is a form of life insurance that is very similar to whole life insurance, except that it gives you the added benefit of allowing you to borrow against your policy if needed. You can also invest the cash value the policy into bonds, stocks or even use it in the money market.
Amie Gottschalk is an avid blogger who writes often for insurance sites. You can follow her on Twitter @amiegottschalk.