How Much Life Insurance Should You Carry?

Death is inescapable, but like taxes, many individuals aren't as enthused about the prospect of it. But in order to ensure that they have the appropriate financial resources in place, including life insurance coverage, it's important to make sure loved ones who rely on your income are properly protected. Life insurance can help cover funeral expenses and burial expenses, pay off debts, and efficiently shoulder the day-to-day expenses you leave behind.

If you don't have life insurance or you have it but you're not sure if your policy is sufficient, check out this guide to assess your coverage needs.

Key Takeaways

• Your financial situation and your household circumstances influence whether you need life insurance, and, if so, how much coverage you should get. 
• The younger and healthier you are, typically, the less you will pay for life insurance, though everyone can purchase it regardless of their state of health.
• It may be recommended to carry as much life insurance as is necessary to pay off your debts plus any interest, particularly if you possess a mortgage or cosigned university loans with somebody else. 
• Your benefit payout ought to be sufficient to support your income, plus a little to hedge against the impacts of inflation on purchasing power.
• There are several rules of thumb used to deduce the perfect amount of coverage.

What Is Life Insurance?

An insurance agreement is known as life insurance, in which the company agrees to pay a particular dividend after the death of the insured individual as long as the premiums are paid and up-to-date. This value is known as the death benefit. It provides a sense of security to the family of the insured man or woman.

Life insurance falls under two categories: perpetual and term. Whole life policies, also known as permanent life insurance, will cover you for your entire life as long as the premiums are paid. Some whole life policies even offer an investment component, so set aside the premiums you pay for them and put them into the market.

Term life insurance, in contrast to other types, often guarantees payment for a limited period of time. For instance, you may purchase a 20- or 30-year policy, depending on your age and how long you'll need coverage. Some policies permit you to renew protection following a set expiration date, while others mandate a medical exam. Between term life insurance and whole life insurance, term life generally offers lower costs.

Who Needs Life Insurance?

Life insurance can prove a valuable funding resource to you personally, but it is not always an advisable purchase for everyone. If you're single and have no dependents with money to cover your expenses relating to death, funeral costs, estate expenses, legal fees, and so on, then you may not need life insurance. If you have dependents as well as assets that will be useful to them after your death, the same is true for them.

If you have a great deal of debt that exceeds your assets or if you examine or care for your children as the principal provider, medical insurance can ensure that your dependents will be cared for if something happens to you. A life insurance policy may also make a lot of sense if you're responsible for running an organization or signing cosigned debts, such as personal loans, for which another person could be held accountable for your death.

Remember, life insurance doesn’t cover every circumstance. For example, a standard life insurance policy won’t pay any disability benefits if your become disabled, nor will it cover long-term nursing care costs. You can purchase disability riders or long-term care insurance riders for an additional premium cost that can cover those situations.

Age and Life Insurance

One of the most pervasive myths among life insurance salespeople is that you never receive the "deal" if you wait until you're older. Insurance companies teach the public that getting insurance once we reach a certain age is impossible. Insurers make their money by betting on the life expectancy of customers.

It is true that insurance is cheaper when you are young, but that isn't to say that qualifying for a policy is much easier. The truth is that insurance companies want to find greater premiums from people who are younger in order to take on a greater risk of issue with injuries, but it's highly unusual that an insurance policy will not approve someone if they are willing to pay their premiums for the risk category. When you do need it, obtain insurance. Do not get insurance because you will be worried about not qualifying later.

Should You Use Life Insurance as an Investment?

If you have a life insurance plan that builds cash value, you could think about that to be an investment. Cash value policies are sometimes known as a way to save or invest for retirement. These plans help you save up capital that accrues interest. This interest is accrued because the insurance firm is investing that money for its benefit, just like other financial institutions. In turn, you will be paid a commission for using the money. 

But, return to return must be taken into account. If you choose the funds from the forced savings program and invest it in an investment fund, such as an index fund, your profits may be higher. People who do not have the ability to restrain themselves from investing regularly can benefit from a cash value life insurance policy. Monitoring discipline, as opposed to exorbitance, could lead to a higher investment return.

What Is the Minimum Amount of Life Insurance You Need?

A large factor in determining how much the life of an insurance policy member is worth to the company is how much money that the dependents need. Among the aspects that determine the amount of the face value is how much coverage you require. As such, the amount of protection that is enough for you may differ greatly from what someone else requires. Financial experts recommend aiming to own 10–15 times your yearly income in life insurance, although your plan could be higher or lower. Consider the following when choosing a minimum of life insurance coverage.

Debt

Life insurance can pay off debts, especially for student loans, car loans, mortgages, credit cards, and personal loans. If you've got any of these bills, then your policy should include enough coverage to repay them in full. If you have $200,000 in a mortgage loan and a $4,000 car loan, for instance, you will need to have at least $204,000 in your assets to cover your debts. Don't forget the extra interest. Take out a little more to cover any extra interest or charges as well.

Income Replacement

One of the primary reasons for life insurance is to use it to cover income. If you're the sole provider of your dependents and bring in $40,000 per year, for example, you'll need an insurance payout that's large enough to cover your income plus a little extra to protect from inflation.

To err on the safe side, suppose the lump sum, or payout, of your policy is invested in 8. You'll need to purchase a $500,000 policy just to replace your annual salary. This is not a one-size-fits-all rule, though adding your yearly retirement income back into the policy ($500,000+$40,000=$540,000 in this case) is a safe guard against inflation. Once you've determined the value of your insurance policy, you can start shopping for it online. There are many online insurance estimators you can use to estimate what insurance you may need.

Insuring Others

Obviously, there are other people in your life who are important to you and you may wonder whether you should insure them. As a rule, you should only insure people whose death would mean a financial loss to you.The death of a child, while emotionally devastating, does not constitute a financial loss because children cost money to raise. However, the death of an earning spouse is a hardship on both an emotional and fiscal level.

In that case, follow the steps of income replacement with the individual's income. The same goes for business partners who have a joint responsibility for mortgage payments on a contract-owned property. You may be required to consider a plan for the subject's death, as that individual's death will affect your financial state significantly.

Methods of Calculating Life Insurance

Most insurance companies say the reasonable amount of life insurance is 6 to 10 times the annual salary. If you add 10, if your salary is $50,000, you would choose $500,000 in life insurance. A few recommend adding an additional $100,000 in life insurance for each baby above the 10x level.

Another way to figure out how much life insurance to buy is to multiply your income by your age until retirement. For example, if a person who is 40 years old makes $20,000 annually, they need $500,000 (for 25 years  $20,000) in life insurance.

Alternatives to Life Insurance

There are several alternatives if you're not getting life insurance to cover debts and have no dependents. Insurance companies have seen the financial advantages of lending institutions, and are jumping in on the act. Credit card companies and banks provide insurance deductibles for outstanding balances. This often amounts to a few dollars a month and, in the event of your death, the policy will pay that particular debt in full. If you opt for this coverage from a lending institution, then make sure to subtract that debt from any calculations you make for life insurance; being doubly insured is a needless cost.

What Is a Rule of Thumb for How Much Life Insurance You Need?

A handful of rules of thumb are useful to use for calculating how much life insurance you will need. These often involve multiplying your current earnings by a number like 10X or the number of years until retirement. Other rules of thumb involve adding up all expenses and obligations your family requires.

Is Life Insurance Needed After Age 60?

Life insurance was produced to supply the financial security of the recipient in the event of a family's death. Life insurance can be purchased by those who have already grown up. This can be carried out for several purposes, including providing an inheritance, establishing a trust upon death, contributing to a charity, or if the older individual is an important employee or business partner.

Many insurers offer term life insurance for people 18 to 65, but depending on your insurer and policy type, some insurers also offer coverage for as long as 80 years of age. However, life insurance prices grow the older you get when you purchase the policy.

What Happens to My Life Insurance if I Lose My Job?

If you lose money at work and have private life insurance your group purchase, as long as you keep making your premiums, you will have insurance. If the insurance policy was bought through your employer group, you will lose coverage within one month after being terminated.

Can I Cash Out My Life Insurance Policy?

If you own an insurance policy that accrues cash value (such as whole life or universal life insurance), you may be able to take out some of or the whole thing. The amount of benefit will decrease in line with the amount you take out from the policy. If you surrender the full amount, you will lose your coverage.

Conclusion

If you need life insurance, it's important to know how to calculate adjustably what type of coverage is right for you. Renewable term insurance is often sufficient for most people, but you must find out the specifics of your situation. If you choose to buy insurance through an agent, pick out what you need ahead of time so you aren't stuck with inadequate protection or high-priced protection that you don't require.