Ah, life insurance: the one thing we know we should probably have, but don’t think of too often. Unless you personally know someone tragically affected by lack of life insurance, it’s easy to put off thinking about. After all, no one really wants to dwell on what life insurance actually means.
Unfortunately, while life insurance is important to have, more people now than ever are uninsured or underinsured. Between 2004 and 2010, the number of people with life insurance dropped from 78% to 70%. Even more worrisome, many people do not have enough life insurance to cover their loved ones in case of a catastrophic event.
If you’ve ever been concerned about why, when and how much life insurance to buy, this post will help evaluate your needs and make the right financial and practical decision for you and your family.
Why Life Insurance Is So Important
Many people mistakenly believe life insurance is to cover a spouse or parent’s salary for a set period of time for regular expenses. However, life insurance is much more than simply replacing someone’s salary. When you have a family, whether you are the primary breadwinner or not, there are many more expenses than you expect.
If you were to unexpectedly pass, not only would your family need to replace your salary, but they would have a myriad of additional expenses associated with your passing. In addition to your funeral expenses, consider what other things your family may need to cope with: perhaps your spouse takes time off from work to grieve, or the children need to visit a therapist to handle their own grief. It’s impossible to predict what could happen with your passing, and having life insurance is vital to giving your family peace of mind in the event of your passing.
In addition, consider what type of life you would like your family to have in the event of your passing. If you are the primary breadwinner and your spouse works part-time in order to spend more time with the kids, would you want your spouse to go back to work full time? Would you want your family to have the same standard of living (after school activities and annual vacation, for example), or would you want them to cut back to make ends meet? Think about the stability you will leave your family, and make plans accordingly to get the right amount of life insurance.
When to Buy Life Insurance
While younger people tend to think they don’t need life insurance until later in life, the reality is that it’s more affordable to buy life insurance while you’re young and policies are cheaper. This doesn’t mean you have to take out the most expensive policy in order to reap the financial rewards. Instead, consider getting the largest policy that suits your family right now. Perhaps it’s just you and a spouse who works full-time. In this case, cover yourselves with the minimum you need now, and change your life insurance policy as your family expands. You’ll likely still be young enough to continue getting a cheaper policy than people in their 50s and beyond.
The most important thing to keep in mind is to add to your policy as your family situation changes. If your spouse reduces their hours in order to take care of children or an elderly parent, increase your life insurance accordingly to cover household expenses associated with your loss of income. If you take on additional debt in the form of a mortgage, consider increasing your life insurance policy in order to cover your portion of the mortgage payments.
How Much Insurance to Buy
The simplest way to determine how much coverage you need is to buy coverage equal to five to 10 times your annual salary. For example, if you make $50,000 a year, you’d buy a policy between $250,000 and $500,000. While this is a simplistic way to look at life insurance, it is a very good starting point. Depending on your situation, you may wish to include any bonuses you receive or side income, if it’s fairly steady.
As your situation becomes more complex, with additional children, homes, or family members you and your spouse may wish to take care of, consider speaking with a financial advisor about your life insurance policy and if it’s adequate for your situation.
While no amount of money can replace a person, it can make that person’s passing easier financially for those left behind. If you’d like to learn more about life insurance and how to choose the best policy, please visit Insure Chance.
Track All Your Accounts With Personal CapitalPersonal Capital lets you see all of your accounts in one convenient place. Sign up now for free.