Choosing a type and amount of life insurance can be an emotional and difficult decision to make. Most insurance agents can assist you in determining how much life insurance coverage is appropriate for your situation. However, ultimately the decision of how much coverage to buy is entirely up to the customer.
Purpose of the Insurance. What is the purpose of insurance? Is it strictly for final expenses or a funeral? To take care of survivors? To leave a legacy to the next generation? If you have dependents which will rely on the life insurance as a means of living, it might seem difficult to determine the precise amount that is appropriate. Consider the following points when a life insurance need is for survivors.
Income Sources. Consider what other sources of income (if any) besides the proceeds from the life insurance policy, your family can rely on at your passing. This might include social security benefits, the surviving spouses’ income, or income from other investments.
Expenses Change Too. On the flip side, consider the expenses your family will incur when you die. At the death of one spouse, some expenses might decrease. For example, there may be no need for a second vehicle. Or, with an elimination of a salary, taxes might decrease drastically. Other expenses might increase such as daycare or health insurance (if it was previously provided through the deceased worker). When considering your insurance needs, work with the monthly household budget you have now and try to create a hypothetical future needs-based budget as if only one spouse is alive.
Immediate and Future Goal Coverage. Next, decide what immediate needs you want the insurance to cover. This can include probate expenses, funeral expenses, or paying off a mortgage or other debt. For future goals, consider if you want proceeds of the life insurance to help fund your spouses’ retirement or children’s education.
Other Things To Consider. Consider the cost of the insurance. If you purchase a term policy and you’re a healthy individual, you may notice only a small increase in premium for a large increase in coverage. Also consider your distance to retirement and current assets accumulated for this goal. Consider whether the surviving spouse will need time off work or additional training to re-enter the workforce.
There are many aspects that go into planning how much life insurance to buy. Honestly sitting down with your spouse or love ones and determining your uses of the insurance will greatly help you understand how much you need should you die.
This is a weekly featured post on Own The Dollar from Sara Peak, a Certified Financial Planner and a veteran of the finance industry. In addition to her monthly “Money Matters” column in Kentucky Living magazine, she also writes about money and personal finance topics on her blog.
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