Choosing a type and amount of life insurance can be an emotional and difficult decision to make. While there is a plethora of available insurance agents to assist you in the process, many are weary of relying on their advice for fear of being “sold” a product they don’t really need.
Most insurance agents can assist you in determining how much life insurance coverage is appropriate for your situation. However, ultimately the decision of how much coverage to buy is entirely up to the consumer.
Here are some things to consider when deciding how much life insurance coverage is appropriate for you.
Purpose of the Insurance:
What is the purpose of insurance? If you do not have any dependents, the purpose of the insurance might be to pay for final expenses or a funeral. Or the purpose of the insurance might be in the form of a gift for the next generation.
These are different needs than if you have dependents which will rely on the life insurance as a means of living. If this is the case, it is a little more difficult to determine the precise amount that is appropriate. If it is for dependents, such as a spouse or children, consider the following points.
Income and Expenses:
What other income, besides proceeds from the life insurance policy, will your family rely on? This might include social security benefits, a spouses’ income, or income from other investments. Identify if there will be any other source of income available.
For expenses, consider which expenses might decrease if one spouse passes away. For example, there may be no need for a second vehicle. With an elimination of a salary, taxes might decrease drastically.
Other expenses might increase such as day care or health insurance (if it was previously provided through the deceased worker.) Work with the budget you have now and try to create a future needs budget as if only one spouse is alive.
Immediate and Future goal coverage:
Next, decide what immediate needs you want the insurance to cover. This can include probate expenses, funeral expenses, paying off a mortgage or other debt. For future goals, consider if you want proceeds of the life insurance to help fund your spouses’ retirement and/or children’s education.
Other things to consider:
Other things to consider are the cost of the insurance. If you purchase a term policy and you’re a healthy individual, you may notice only a small increase in premium for a large increase in coverage.
Also consider your distance or proximity to retirement as well as your current assets already accumulated for this goal. If the breadwinner dies prematurely, consider whether the other spouse will need time or additional training to re-enter the workforce.
Lastly, remember you are purchasing life insurance coverage in today’s dollars. For example, a policy with $1,000,000 coverage today and an inflation rate of 3% means that in 20 years, that same amount has purchasing power of only $553,675.
