Life insurance is a contractual agreement between an insurance company and an insured person, where the insurance company agrees to pay a specified amount, known as a death benefit, to the beneficiaries after the insured person’s death, as long as the premiums are paid and up to date. There are two types of life insurance: whole and term. Whole life policies cover the insured person for their entire life as long as the premiums are paid, while term life policies cover the insured person for a set term.
It is important to determine the amount of coverage needed when purchasing a life insurance policy. Financial experts often recommend purchasing at least 10 times your annual income in coverage, although your personal number may be higher or lower. You should consider taking out a little more to settle any extra interest or charges as well. Here are some of the most important considerations for choosing a minimum amount of life insurance:
|Consideration||Minimum Coverage Needed|
|Outstanding debts||Amount needed to pay off all debts|
|Income replacement||At least 10 times your annual income|
|Children’s education||Amount needed to cover education expenses|
|Years until children reach 18 years old||Amount needed to replace income until children reach 18 years old|
If you are single and have no dependents or have enough money to cover your debts and the expenses related to death, you may not need life insurance. The same applies if you have dependents but enough assets to provide for them after your death. 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. Having a life insurance policy also makes sense if you own a business or owe cosigned debts for which someone else could be held responsible if you pass away.
Life insurance is often intended to replace the economic loss of someone with a family to support in the event of their untimely death. However, it can also be purchased by those whose children have grown up to leave an inheritance, establish a trust upon death, contribute to a charity, or if the older individual is a key employee or partner in a business. Still, many insurance companies only offer term policies for those aged 18-65, and premiums increase the older you are when you purchase the policy.
If you choose to buy insurance, 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. Education is essential to making the right choice about whether you need life insurance and, if so, what level of coverage, so be sure to do your research to acquire the best life insurance for you.
- Western & Southern Financial Group. How Much Life Insurance Do I Need? - Nerdwallet
- Investopedia. How Much Life Insurance Do You Need?
- Investopedia. How Much Life Insurance Do I Need?
- Forbes. How Much Life Insurance Do I Need?
- Lincoln Heritage Life Insurance Company. How Much Life Insurance Should You Have?