Key Takeaways
- If you have dependents, you need life insurance.
- What are some factors to consider when determining how much life insurance to buy?
- Know the difference between term insurance and cash value insurance.
When a young person passes away, it’s always a devastating event, on multiple levels. When a person has dependents and no life insurance, an untimely death makes a horrible situation much more difficult for his or her family.
So, it’s important to ask yourself if you need life insurance. The answer is likely, “Yes.” Why do you need it? Simply stated, your family will need it to replace the income you would’ve made if you were still alive.
Is there a guideline for how much life insurance a person needs? A very basic rule of thumb is that you’ll need 15 to 20 times your annual salary. If you make $60,000 a year, you’re going to need somewhere around $900,000 to $1.2 million in coverage.
If you’re looking to calculate something a bit more accurate, take a look at what expenses you have now and what your family will need down the road. For instance, if your expenses include the following:
- $300,000 mortgage on a home
- $300,000 to $400,000 anticipated college tuition for children
- $40,000 annual living expenses for your spouse (at a rate of 4%, this comes to $1,000,000)
Add these up, and you’ll arrive at $1,800,000. This type of needs analysis is simply a matter of walking through the major expenses that you would like to have taken care of.
Another question that often arises for couples is whether life insurance is needed for both spouses. If both are employed, then yes, it’s needed for both. If there are children in the family, also take into consideration potential childcare costs – if one parent is not earning an income, but is the primary caretaker for the children, what would it cost to pay for childcare in that person’s absence? The same goes for eldercare, should you or your spouse be caring for an adult family member.
Finally, there’s the matter of what type of insurance to buy. There are two types: term insurance and cash value insurance.
Term insurance is like auto insurance: you pay for it, something happens, the insurance company pays you, and there’s no money left over. It’s not very costly – for those in their 30s, it may cost between $500 and $1,000 per year to get coverage of $1,000,000 to $2,000,000.
With cash value insurance, you build cash value in the contract over time. You may be doing that for purposes other than simply purchasing life insurance – it may be to help save towards a goal or for retirement, for instance. Cash value insurance is much more expensive than term insurance.
So, if you don’t have life insurance (or if you do, but don’t have enough), give some thought to what financial needs your loved ones will have, were something to happen to you or your spouse. You’ll sleep better at night, knowing they’d be taken care of. Until next time, enjoy.
Gary
If you’d like to read more on this topic, here are a few of Gary’s previous posts that you might enjoy:
The Primary Reason for Life Insurance
