Life Insurance: How Much Coverage do I Need, if Any?
Do I Need Life Insurance?
Life insurance isn’t one of those warm and fuzzy topics that everyone loves to address. Making and investing money can be incredibly exciting. Creating a plan to protect your loved one’s finances in the event that you pass away – not so thrilling, yet it is extremely important. The good news is that you may already have basic coverage for free through your employer (and some employers offer supplemental life insurance coverage), and even if you don’t, you may not even need it at all.
People that Don’t Need Life Insurance:
- Those with zero dependents: If you’re single with zero children and nobody depends on your income, then you have no need to be insured.
- Children: Unless you were Macaulay Culkin’s parents in the early 90’s, you’re probably not dependent on your child’s income, so there is no reason to purchase life insurance on a child.
- Retired folks: If your only income is generated from money that you’ve already earned, you no longer need to insure against income that will be lost if you die. In retirement you’re living off income that is already earned, or income that will be generated from itself, not you.
People that Do Need Life Insurance:
- Those with a mortgage or other large debts: Good and bad debt included, your loved ones should be covered completely through life insurance to be able to cover all of your debts.
- Those with children: If you have a loved one who is dependent on your income to help pay for your children’s schooling or are a single parent, consider taking out a policy to cover the future expense of your children’s college education.
- Those with other non-children dependents: This could include a partner, family member, or someone else who is dependent on your income, or will be dependent on your income in the future. Worth lumping into this category are those with a spouse or other partner who would not be able to invest in their retirement without your income. Many times people are only able to save for their retirement when they are able to combine the power of two incomes. If one income vanishes from the equation, will your dependent still be able to save on their own?
I Do Need Life Insurance. Now what?
If you have determined that you do need life insurance, you’ll next need to determine how much you’ll need. One thing to keep in mind as you are running the math is that life insurance payouts are in after-tax dollars (meaning you don’t pay tax on them). Let’s figure out what you may need to cover:
- Funeral expenses
- End of life expenses (medical, primarily)
- Mortgage debt
- All other debts – vehicle, student loans, credit, etc.
- Living expenses to ensure your dependents can live comfortably
- Potential future education expenses for dependents
Next, you’ll need to determine how many years of your income your dependents will be reliable on you for if you were to pass away today.
Life Insurance Calculators:
Yahoo has a good life insurance calculator life insurance calculator.
Or, for a basic estimate, here’s a general table to assist you:
So Now I Know I need Life Insurance and how Much I Need, Now what?
The first thing you should do is check to see how much life insurance you currently have. Your employer may currently cover you already, albeit, often times not to the amount that you really need.
Later this week, we’ll discuss what kind of life insurance you should look to get.
Now that you know a little more about life insurance, for what reasons do you think you will or won’t need life insurance?