This is probably one of the most common questions some one could ask when it comes to acquiring life insurance, but to understand how much you need you will need to keep in mind that the primary purpose of life insurance is to ensure that the people that matter most to you have enough money after your death. Although it's an essential piece of your financial picture, around 40% of adults in the U.S. have no life insurance, according to a survey by employee benefits provider Unum. About half of all U.S. households don't have enough life insurance coverage, says life insurance industry group LIMRA.
While the names can be confusing, life insurance policies boil down into two main categories: permanent and temporary. Each type requires a premium – often paid monthly – and all policies have a death benefit. Permanent life insurance includes whole life and universal life. They are designed to stay in place for the rest of your life, which is how these policies earn the "permanent" status. Temporary life insurance is commonly called term life insurance. The "term" is the amount of time that the policy is active, and your beneficiaries only receive a death benefit if you die within this amount of time. Typical terms are 10, 20 and 30 years. After the term expires, the policy ends and you no longer have coverage.
So what is the death benefit? The death benefit is the money that the life insurance company pays to your beneficiaries after your death. The amount of the death benefit depends on how much coverage you have. Setting this amount is one of the most important decisions you'll make when buying life insurance. Coverage amounts can range from a few thousand dollars to a few million dollars.
Beneficiaries are the individuals that receive the death benefit. A trust or organization can also be a named beneficiary. If you want to leave someone money who is currently a minor, or who otherwise may not handle the money responsibly, consider setting up a trust instead. After your death, the money from the death benefit goes into the trust. The trustee, whom you also designate, oversees your trust and can manage how much and when the beneficiary gets the money.
When you are ready to buy life insurance, make sure you are working with a reputable insurance agent or broker that gives you advice based on your needs. If you don't already have a relationship with an agent or prefer not to work with one you can also get a quote directly here.
So how much Life Insurance do you need? The right amount of life insurance coverage depends on your personal situation. You may want the money to replace your income for as many years as your beneficiaries need it, cover your debts and end-of-life expenses and/or provide for one-time expenses such as a child's college tuition. Around 20% of those with life insurance say their coverage is too low, according to the Insurance Information Institute (III). A few easy calculations can keep you out of this group. The quickest way to estimate your coverage needs is to multiply your annual income by five or 10. This simple calculation is a good way to get a ballpark idea, but it isn't very precise and should be followed up with a more thorough review of your needs.
You should start your in-depth assessment by taking a look at your annual income. If you have a spouse or child who depends on your income, calculate how much they need to live on each year and multiply it by the number of years they need this income. A surviving spouse that reaches retirement, for example, may be able to live comfortably with income from the retirement accounts and may not need extra life insurance for those years. Later as children move out of the house and become financially independent, they become less reliant on your income. If you don't contribute directly to the household's total income, consider other ways you are supporting your family. For example, a stay-at-home parent may not be depositing any income into the bank account, but their death can lead to unexpected bills. With one parent gone the surviving parent may need to hire someone to help clean the house, prepare meals and drive the kids to school. Consider these added costs when estimating life insurance if you don't work outside of the home.
Then you can add in the cost of any large one-time expenses and debts. College tuition tends to be the largest expense in this category. The average tuition, fees and room and board for an in-state, four-year school costs $21,950 per year, according to The College Board.
Some of the other large expenses you may want to account for include assistance with a child's wedding or house. Your spouse may want to pay off the mortgage or plan for a sizable purchase. They may need to pay off your credit cards, car loans and any other debts. Heirs may owe estate taxes after your death. Caretakers looking after aging parents may have medical bills and nursing home expenses. Those wishing to leave behind a legacy may also want to add charitable donations to their coverage calculations.
We should also plan for expenses for your end-of-life needs. Between funeral costs and possible medical expenses, your family may have to come up with several thousand dollars after your death. Though medical bills may be difficult to account for, you can include estimates for your service and burial. Funeral costs for a traditional service typically run from $8,000 to $10,000.
Also consider your current assets. From your above total, subtract any other life insurance policies you have. Additional assets to take into consideration include real estate, business investments, retirement accounts, cash accounts, stocks and mutual funds, and other investments. Deduct any of these assets from your liabilities to calculate how much life insurance you need.
The fact is that any time you have a major life change, you should reevaluate your life insurance coverage. Situations such as changing jobs, moving to a different state, getting married, having a child or getting a divorce may impact your coverage needs. If you need guidance or have questions feel free to inquire here.