How Much Coverage Should I Get For Voluntary Life Insurance?
Life insurance is a type of insurance agreement in which an insurance company agrees to pay a specified amount after the death of an insured party, as long as the premiums are paid and up to date. This amount is called a death benefit. There are two types of life insurance policies: whole and term. Whole life policies are a type of permanent life insurance, meaning you’re covered for life as long as your premiums are paid. Term life insurance, on the other hand, covers you for a set term.
When it comes to voluntary life insurance, the amount of coverage you need depends on several factors. Here are some of the most important considerations for choosing a minimum amount of life insurance:
| Consideration | Explanation |
|---|---|
| Outstanding debts | Life insurance can be used to pay off outstanding debts, including student loans, car loans, mortgages, credit cards, and personal loans. If you have any of these debts, then your policy should include enough coverage to pay them off in full. |
| Income replacement | One of the biggest purposes of life insurance is to replace income. If you are the sole provider for your dependents and bring in $40,000 a year, for example, you will need a policy payout that is large enough to replace your annual income, plus a little extra to guard against inflation. |
| Child education expenses | If you have children, you may want to consider the cost of their education in your life insurance coverage. The DIME (debt, income, mortgage, education) approach suggests a minimal amount of coverage that will cover family expenses, including education expenses, in the event of an untimely death. |
Most insurance companies recommend purchasing at least 10 times your annual income in coverage, although your personal number may be higher or lower. If you’re married, then both you and your spouse may need life insurance coverage, even if only one of you is primarily responsible for your household income. As a rule, you should only insure people whose death would mean a financial loss to you.
Life insurance can be a helpful financial tool to have, but buying a policy doesn’t make sense for everyone. If you don’t have dependents or enough assets to cover your debts and expenses related to death, then you may not need life insurance. However, if you’re the primary provider for your dependents or have a significant amount of debt that outweighs your assets, then insurance can help ensure your loved ones are well taken care of if something happens to you.
When it comes to purchasing life insurance, educating yourself is essential to making the right choice about whether you need life insurance and, if so, what level of coverage. Use one of the common methods to calculate the coverage you’ll need before meeting with an agent or broker to avoid getting stuck with inadequate coverage or expensive coverage that you don’t need.
