How Much Life Insurance Do You Actually Need?
There are many questions revolving around life insurance. How does one know if they need life insurance? And, if they do need it, how big of a policy should they apply for? These are just a couple of the questions regularly asked by financial advisors.
According to J.D. Power and Associates, studies have proven that 40% of American adults do not have any life insurance. In addition, 50 million of those who have life insurance are not adequately covered. (Source: “Too Many People Lack Adequate Life Insurance Coverage,” J.D. Power and Associates, February 24, 2012, last accessed December 28, 2012.)
At the very core, with life insurance, a person is trying to make sure that their loved ones keep the same standard of living once he or she passes away. The need for life insurance differs from one person to another, but there are no limitations as to who can buy life insurance—it can be a married person who is planning to start a family, or a person who is retiring and has no dependents.
Keeping that in mind, should you take out a policy for $1.0 million because you want your loved ones to not go through any troubles after you are gone?
Every person’s needs are different. For example, a person who is starting a family and has dependent children will need to buy a different amount of life insurance compared to a person who is retired and has no dependents.
There isn’t a number attached to how much life insurance a person needs, but there are a few questions you can ask yourself to figure this number out.
What Are my Needs for Life Insurance?
As stated earlier, life insurance is all about making sure that your loved ones maintain the same standard of living once you pass away. But there are times a person might be more vulnerable to death.
For example, the family of a person who has to pay a mortgage, with dependents who are enrolled in school, and with very little savings is more vulnerable to his death than the family of a person in his late years with a paid-off home and hefty savings in his bank account.
It should also be noted that some individuals might not need life insurance, because they have a sufficient amount of savings and assets to support their loved ones.
What Kind of Insurance Do I Need?
You may hear about different forms of life insurance, but at the very basic level, there are only two types: 1) term life insurance; and 2) whole life insurance.
Term life insurance is for people who are looking for temporary protection. What does it mean? It means that if you decide, 20 years from now, that you will have no dependents, your home will be paid off, and you will have enough savings and assets to cover your expenses, then you only want to insure yourself for a limited time. In this case, you go ahead with term life insurance.
On the other hand, whole life insurance is for people who are looking for insurance coverage for their entire life. This type of insurance is for people who are looking for long-term coverage. It is life-long coverage, and as long as the person continues to pay towards their policy, they are insured.
How Much Are my Expenses?
You need to make sure that you account for your expenses with great attention, because they are the most critical part in identifying how big a life insurance policy you actually need.
In addition to the current expenses, you also need to consider future expenses. For example, if you have kids, you will have to consider their education expenses and other living costs. Similarly, you will also have to consider inflation in this process, because as time progresses, prices increase.
Choosing the right type and amount of insurance can sometimes be overwhelming to individuals, but if they ask a few of the questions mentioned above, they can certainly get a general idea about their life insurance needs.