How Much Life Insurance Do You Really Need?
b"Life Insurance for the Attention Span Challenged
Today I want to help you understand a topic that many may find a little bit morbid, dull, and baffling: Life Insurance. Okay, before you zone out, you should know that, short of dying rich, life insurance is probably the best way to take care of your loved ones after you're gone.
Most of us are naturally reluctant contemplating our own death or the demise of our loved ones, but for the sake of your family and your peace of mind, you need to overcome this aversion and face up to it.
Okay, so I'm not going to try to convince you that the subject is fun, but I would argue that it's not as hopelessly confusing as you might think it is.\\xa0 I'm going to try to walk you through it in simple and practical terms.
If this in any way sounds like a sales pitch, it\\u2019s not and I don't think everyone needs life insurance.
But the question is: Do You Need Life Insurance?
Well, who needs life insurance and who doesn\\u2019t? This answer is easy: if you have dependents\\u2014children, a spouse\\u2014or if you don't have adequate savings or other assets, life insurance can replace your lost income if you die.\\xa0 If you want to provide them with a similar lifestyle to the one they're accustomed to, life insurance can fill this role in your financial plan. By lifestyle, I mean annual income to cover recurring costs like rent, food, and bills but might also include major one-off expenses like college tuition or a new car, for example.
Basic Options in Life Insurance
On to the thornier part of the life insurance puzzle: what kind of life insurance makes the most sense in your case?\\xa0 There are two basic categories: term life and permanent life policies. Permanent Life goes by many names: Cash-Value, Whole, Universal, Variable, to name a few.
They are permanent because, unlike term life which covers a fixed number of years, permanent policies are structured to last a lifetime.
I\\u2019ve promised to spare you from drowning in a sea of details, so I want to narrow these down to a basic choice between term life and whole life insurance.\\xa0 If your goal is to protect your family for very long periods of time or to substitute for a closing of your business or to pay for estate taxes after your death, you'll want to look into whole life or universal insurance. If you are primarily concerned with protecting your family from the loss of income that would result from your death, during your working years, a term life policy makes more sense and is significantly easier to pay because the premiums are much lower.
How Much Life Insurance Do You Need?
Let's turn to the question of how much insurance you need.\\xa0 Some advisors throw out a generic recommendation of 5, 10, or 20 times your annual salary, but you'd be well served to look closer at your finances and your family's particular needs before deciding on an amount.
For starters, add up all your unpaid debts, your mortgages, your credit cards, your loans as those will be directly deducted from the insurance proceeds.\\xa0 If you think you\\u2019re going to add on more debt over time, you\\u2019ll want to buy more insurance to cover it.
The next factor\\u2014in some ways the heart of the issue\\u2014is replacing the loss of income that you're no longer providing for your family.\\xa0 What will happen is that the insurance proceeds will be invested in assets that will generate some income for your dependents to live on and also cover future one-off obligations like college tuition.\\xa0 At this point, you probably want to err on the side of a slightly more generous level of income to guard again inflation.
Figuring out how much the insurance payout must be to generate enough income is tricky because of the volatile nature of investments.\\xa0 In order to arrive at the size of the insurance payout you need, you have to make a reasonable assumption about the average annual ..."