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How Much Life Insurance Do You Need? A No Cap Guide to Protecting Your Loved Ones

Situations, responsibilities, and the ability to pay to vary from one person to another.

So, the ideal amount of insurance to buy also varies depending upon the circumstances. Most people look upon insurance purchase as an essential step to provide financial coverage for their family.

It is possible to make a sound estimate of the amount. Consider factors such as your current financial strength, likely financial flows, and what your family may need in the foreseeable future.

The gap between your financial obligations over the longer term and your assets is a broad indication of the ideal amount for the life insurance policy you need to purchase.

When you are shopping for life insurance coverage, there are specific considerations you should keep in view, such as:

Financial Aspects to Take Into Account

1. Number of Dependents

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Consider the expenses for raising your child and care of the elderly in your family. You need to increase this amount by thousands of dollars if you have any more dependents to care for.

Everyone does not buy the same amount of life insurance coverage because lifestyles, as well as the needs, differ depending upon the circumstances.

However, there is a reasonable amount of insurance that everyone may need, irrespective of the fact whether you have kids or are an expecting parent or not.

2. College Costs

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In case you have children, factor in the expenses for college education in deciding the life insurance amount.

Children with higher education enjoy upward mobility and a more comfortable standard of living in later life.

However, picking the tuition fees tab saps your finances in adult life. College tuition fees are ever on the rise.

College Board calculation indicates an increase of $8000 in average tuition fees during the last decade at a four-year private college. You need to consider the type of college and courses you may need to pay for.

3. Your Debt

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Many people live their entire lives in debt, and a large percentage also breathe their last in debt.  Who becomes responsible for paying these debts?

It depends upon who cosigned the debt with you. If it is a student loan cosigned by your child, he or she will have to pay it.

If it is a mortgage cosigned by your spouse, they have to pay it.

There are a few other aspects to consider. You would like to leave enough to enable your family members to continue paying the loans. This is more so when family members use a loan as collateral, such as a house or family car. 

If you have not provided for it and your successors are unable to pay the loans, then the creditor has the first right to the asset to recover debt payments.

4. Financial Buffer

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While calculating the life insurance amount, think of the provisions you want to make for your family.

In addition to food, education, and medical expenses, you may want to provide for some discretionary items like family vacations.

Add all the monthly bills and fixed payments to get an idea of the level your family is financially dependent on you.

5. Funeral Expenses

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Today people like to factor in the costs of funeral expenses in life insurance coverage.

These expenses, which include funeral home and burial costs average in the range of $7000 to $10000.

This reduces the family’s financial stress and helps them to bear their emotional pain of losing a dear one.

Various Personal Considerations

While financial considerations are crucial to any such decision, other aspects need attention. Let us look at some of these aspects.

1. Age and Health

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Two vital factors to consider before buying a life insurance policy are your age and health, and these factors also determine the duration of your policy. 

If you are older, you need less coverage because you might leave a smaller amount of debt to be paid and have fewer dependents.

While age is an essential factor in the size of the policy amount, it can never be linked to putting off buying a policy. Look at the other side of the coin.

Higher your age, the higher will be the life insurance premium rates.

If your age is closer to the average death year, you are likely to pay higher premiums than when you were younger.

You will mostly get an affordable rate and higher coverage, when young and healthy.

So, lock in a reasonable rate as soon as you feel the need for life insurance.

The Affordability Aspect

A life insurance policy you cannot afford is useless for you. You must be able to pay premiums regularly from your income. You need to assess how much you can pay for these payments for many years.

Higher coverage amount means higher premiums too.

Then, you need to decide whether you want term insurance or whole life insurance. The term insurance expires after the set number of years.

The whole life insurance is co-terminus with premium payments and is six to ten times more costly than term insurance.

People with a budget should prefer a term insurance policy.

Term Vs. Whole Life Insurance

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When chosen carefully, a term life insurance policy is more affordable than generally understood. Consider this example of a 30-year old healthy male who will pay a monthly premium of 36.25 for 20 years to buy a $750,000 policy.

You minimize the cost by reducing the number of years as well as the policy amount.

Ultimately, you will know the exact price of a life insurance policy after you factor in your lifestyle, medical history, and driving record.

How Much Life Insurance Do I Need To Get?

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Term insurance is available for a range of $ 20,000 to $10 million.  The normal range for purchasing policies is $250,000 to $1 million for people in the age group of the 30s to 40s.

This is not an ideal coverage but reflects people’s choices based on affordability and other factors.

Here are some pointers to determine how much life insurance coverage you need:

  • Consider all your resources such as after-tax income and liquid assets
  • Your financial obligation which is expenditure and debt.
  • Find the coverage gap by deducting liquid assets from financial obligations.
  • The coverage gap is your life insurance policy amount.

After a few years of buying a policy, if you find that your needs have changed, you can adjust the policy amount with a rider.

In an insurance policy, a rider means a provision available at an added cost.

You can always manually calculate the life insurance policy cost, but it is time-consuming. An easy Life Insurance Calculator helps you calculate the policy cover to meet your financial obligations.

This calculator takes into account the factors mentioned above when you input the data and tells you the coverage gap to decide the insurance policy amount and in a way, the amount of your death benefit to your heirs.

Do You Need To Purchase Life Insurance?

Your need for life insurance cover depends significantly on what your situation is and whether you can pay the premiums, without any financial stress.

Here are a few situations in which you might not have to buy a life insurance policy:

  • Low-income earners
  • Young singles
  • Employer offers group life insurance
  • Self-insured

Buying insurance requires a 360-degree approach, and the information here should provide a basic framework for you to determine whether life insurance is the right option for you.

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Written by John D. Saunders

John is a Marketing Strategist and Consultant with a knack for financial literacy. As the Founder of 5Four Digital,
a Marketing Agency in Miami, John leverages his understanding of money management and Marketing to create financial opportunities.

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