When the time comes to buy life insurance, there are many decisions to make. One of the most important is determining which coverage to purchase; in other words, how much money will be given to the beneficiaries of the policy upon the death of the insured.
Deciding on this amount isn’t always easy. There are many factors to take into consideration. But it is an extremely significant decision, because much of the future will depend on it. Read on to learn how to how to decide on the best coverage for your life insurance.
Coverage, Benefits, and Life Insurance Article Contents
Life Insurance Coverage
How Much Coverage Do I Need for My Life Insurance?
Tips for Defining the Coverage for Your Life Insurance
Life Insurance Coverage
If you are thinking about buying life insurance, surely you have already asked yourself these questions: What coverage do I need? How much should my death benefit be so that my beneficiaries can be properly taken care of if something happens to me? As you have likely realized, these are not easy questions to answer.
In fact, according to the Life Insurance and Market Research Association (LIMRA), the subject of life insurance is so complicated that the majority of families are underinsured in the United States. This means that they have less coverage than they need. In total, LIMRA calculates that the gap between what most households have and what they need amounts to around $320,000.
This is not something we should take lightly, because the things we care the most about in our lives will depend upon our life insurance coverage. And the amount of our life insurance doesn’t just determine the money our beneficiaries will receive, it is also one of the most important factors in defining how much you will pay in premiums. The greater the coverage in your plan, the higher your premiums will be.
This is why it’s important to carefully choose your coverage when buying a life insurance policy. Once you have gone through the underwriting process for the policy to determine if you qualify for life insurance, deciding on coverage is the next step. However, many people make mistakes at this stage. They think they won’t need very much, or on the contrary, they choose too much coverage and realize later that they are paying far more than they need. Some people think that the group life insurance offered by their employer or other institutions is sufficient. Of course, group insurance isn’t a bad option, but the coverages they offer are usually not more than two or three times the insured’s annual salary. Though this can be a significant amount, it may not be enough for a family to manage when the head of household or primarily income provider is no longer around.
As you can see, calculating the amount of money you need for coverage is fundamental. Read on to learn how.
How Much Coverage Do I Need for My Life Insurance?
To choose your coverage amount, you’ll have to do some math. You have to calculate how much money your beneficiaries will need from the insurance to move forward and maintain their lifestyle without you, ensuring that your loved ones won’t have to carry a financial burden.
It is common for people getting life insurance to make a simple calculation: multiply your annual salary at the time you take out the policy by ten. This isn’t a bad approach, but it is a very generic calculation that fails to consider several other elements, such as:
• Income: How much money do you earn annually? Consider all sources of income, not just salary but also pensions, returns on investments, etc. This is the base amount you should use in making the calculation. Then think about how many years you want to be covered. Multiply your annual income by this number of years, and the result will be the amount you need to replace yourself as the main source of income for your family.
• Education: If you have children, calculate how much money they will need to finish their studies, or at least the amount they will need to complete the stage of education they are currently in. For reference, you can calculate $100,000 for each child’s education.
• Debt: Do you have debt? Mortgage? Loans? Add up everything you owe and don’t forget to add funeral expenses. This amount should be covered by your death benefit.
These are the basic factors you should take into consideration when calculating your coverage amount. It is common for this to be a relatively high number at this point. Now you can subtract the following:
• Savings: If you have savings, subtract this amount from the coverage amount you calculated.
• College funds: If you have any type of savings for your children’s college, you can also subtract that from the total amount.
• Existing insurance policies: If you have any other life insurance policies, such as a group plan, you can deduct the overall coverage from the amount this policy will contribute.
You should now have an approximate idea of what you need. However, you should also consider the effects of inflation. The cost of living could increase significantly in the ten years after your death. Keep in mind that a certain annual amount could be enough for your family to manage during the first few years, but it might be insufficient in the long term.
Finally, you should also consider the following factors. While secondary, they can also impact how much life insurance you’ll need.
• Your health: Do you have a serious illness? Are you healthy? Assess your medical condition and think about how probable it is that you will live for a long time, or if your life expectancy is limited by your health.
• Your habits: Consider whether you engage in any high-risk sports or if your job is dangerous. The riskier your lifestyle is, the higher your chances of having a serious accident, and consequently, the likelihood that your loved ones will need your insurance.
• Your children: If you have small children, you will have to consider the significant expense of their education. On the other hand, if they are older and independent, you may need less coverage.
• Taxes. In some states, inheritance is taxable. This long-term expense could present complications for your family. For this reason, it’s often recommended that you plan your inheritance using life insurance.
With these recommendations in mind, you can now make a more precise calculation to determine the amount of your life insurance. You can also use our life insurance coverage calculator.
Tips for Determining the Coverage of Your Life Insurance
In addition to calculating coverage amount as described above, keep in mind the following words of wisdom:
• Review your policy. You should review your life insurance policy as often as you think is necessary and adapt as you see fit. You may realize that you don’t have enough coverage, or have more than you need. Either way, reviewing your policy will help you better manage expenses.
• It’s better to have too much than too little. When making the final decision, it’s best to have a little more than you think you’ll need. At first it may seem difficult to finance, but it will get easier with time. This extra coverage could also help you manage future increases in income.
• Decide as a couple or group. Life insurance is a big decision, and one you shouldn’t make on your own. Compare your calculations with your partner’s or even your children’s. The closer your numbers are, the more precise the estimate.
• Purchase several plans. Some experts recommend buying several policies with lower coverage rather than a single, high-value policy, a strategy that could allow you to make more accurate adjustments as your needs change. If you need more or less coverage, you can simply reduce or increase the number of policies or their amounts. If you plan on doing this, you should combine different temporary plans.
• Talk to a professional. Before you sign a policy, ask for quotes to compare price and coverages. It’s also a good idea to talk to an agent. They are the experts in calculating death benefits and will help you make an informed decision.
You now have all the necessary details to decide on the amount of your life insurance. Remember that this is an important decision, and that the future and wellbeing of your loved ones depend on it. Don’t make mistakes when calculating your life insurance coverage.