No one wants to consider their own death—but if your family relies on you financially, buying life insurance is a critical step in making sure that loved ones can pay the bills in the case of your untimely passing. It can often be very difficult to determine exactly how much life insurance you should buy as it depends on your current finances and the needs of you and your family. In this blog, we will discuss the two different types of life insurance available, as well as how to make a well-founded estimate of how much coverage to purchase.
Permanent vs. Term
Life insurance isn’t usually necessary for people without dependents who have enough money saved to cover their expenses and debts. However, if you’ve decided that life insurance is necessary for you and your family, it’s important to weigh which type is best for your situation: permanent or term.
Permanent life insurance can last an entire lifetime and may be less expensive over time because the premiums usually remain relatively stable. Depending on what type of permanent life insurance you choose, it can also build equity, also known as cash value, by tying its buildup of money to a stock market index. Consequently, the cash value can grow on a tax-deferred basis and can even be accessed during your lifetime. Permanent life insurance pays out regardless of when you pass away.
Term life insurance covers a person for a set period, such as 10 or 20 years, and is usually more suitable for those with short-term needs, like those who only want coverage during the time they are actively raising a child. This type of insurance policy is often more affordable at first than permanent life insurance, but premiums can increase, making it more expensive in the long run. It also does not build cash value like permanent insurance and pays out only if you die during the term.
How Much to Buy?
Although some financial experts recommend buying about 10 to 15 times your annual income in life insurance coverage, the reality is that the amount you should purchase relies heavily on your assets, debts and whether you have dependents.
As a general rule, the amount of coverage you buy should be able to make up for the difference between your total financial obligations (salary, debts, mortgages and expenses), and your total liquid assets. When it comes to determining how much salary to account for, multiply your annual income by how many years you believe your family will need financial help. The goal is to completely replace the income you make while alive, plus some extra.
If you have kids, estimate the price of sending them to school and account for that as an expense. Funeral costs, taxes and other charges should also be considered when determining coverage. Don’t forget about any potential interest on debts!
Life insurance goes further than just making sure your family is taken care of—it can also be a medium for charitable giving. Some life insurance policies have riders for charitable donations, which pay out a percentage of the policy to a charity. In some cases, policies can be gifted to charities in their entirety, or charities can even be named as a beneficiary on a policy.
We Are Here to Help
If you are still unsure about how much life insurance you should buy, or what type of policy is right for you, reach out to our professional agents and brokers for help. We will work alongside you to determine a plan based on your personal needs that will provide both you and your family with the peace of mind you deserve.