Do I Need Life Insurance?
Purchasing a life insurance policy can help provide dependents with financial security after you’ve passed away. To choose the face value, referred to as the amount your life insurance policy will pay dependents when you die, it’s important to consider the following:
- How much debt you have: All your debts must be paid off in full, including car loans, mortgages, credit cards, etc. If you have a $200,000 mortgage and a $4,000 car loan, you would need at least $204,000 in your life insurance policy to cover your debts and interest.
- Income replacement: One of the biggest factors for life insurance is for income replacement, which will be a major determinant of the size of your policy. If you are the only provider for your dependents and you earn $40,000 a year, you will need a policy payout that is large enough to replace your income plus a little extra to guard against inflation. Just to replace your income, you will need a $500,000 policy. This is not a set rule, but adding your yearly income back into the policy ($500,000 + $40,000 = $540,000, in this case) is a fairly good guard against inflation. Remember, you have to add this $540,000 to whatever your total debts add up to.
- Future obligations: If you want to pay for your child’s college tuition, you will have to add this to the amount of coverage you want. This could cost about $100,000 but could cost much more, depending on the college’s or university’s tuition.
When you total the costs, you will probably want a life insurance policy for $840,000. Let’s break this down:
- $540,000 to replace yearly income + $200,000 for the mortgage expense + $100,000 for the higher education expense.
You might wish to insure other people in your life. As a rule, you should insure only people whose death would mean a financial loss to you. If you have a spouse or partner who is a contributor to your family’s income, then it would make sense to go through the same exercise to determine the face value of the life insurance policy.
Once you determine the required face value of your life insurance policy, you can start shopping around for the best policy for your dependents.
BeneFinder’s agents can help you save money and time in finding the appropriate life insurance policy based on your needs.
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