How Much Life Insurance Do You Need? Key Factors to Consider
Life insurance is not exactly a sexy subject, and it is not something most people want to think about. After all, even considering life insurance means accepting the unpleasant fact that you will die someday, possibly at a young age and in an unexpected manner.
The unpleasant nature of life insurance is hard to deny, but that does not mean that the subject is unimportant. On the contrary, a life insurance policy can be one of the most critical purchases you will ever make, and failing to secure those protections could put all your other purchases at risk.
If you die without sufficient life insurance in place, your surviving spouse may be forced to make some terrible choices, from going back to work instead of raising the children full time to moving to a smaller and more affordable home. If you want to give your family, and yourself, peace of mind, you need to tackle your fears and assess your need for life insurance. Here are a few things to consider before you start shopping.
Who Depends on You, and for What
The most important question to ask yourself when considering life insurance is who depends on your income. If the answer is no one, you can put off this unpleasant discussion until you have a family to support. But if you do have a spouse, children or both, life insurance could prove a pivotal purchase should an unexpected tragedy strike.
If others do depend on your income, think about the impact your salary plays in their lives. Does your spouse rely solely on your income, or is the money you bring home only part of the picture. What would have to change if your salary was suddenly eliminated, and which bills might go unpaid? Once you know these answers, you can start to determine how much life insurance you would need.
How Much the Partners Earn
Let's consider a hypothetical example where one spouse earns $80,000 and the other earns $40,000. The family relies on both incomes to make ends meet, and the absence of one of those salaries would put a severe financial strain on them and their children.
In this case, both spouses can reduce the risk by purchasing term life insurance policies with death benefits designed to generate replacement income. For the spouse earning $40,000 a year, a one million dollar policy could generate $40,000 with a 4% withdrawal rate, while it would take two million dollars to produce the $80,000 in income the other spouse brings home.
How Much Savings Do You Have
Having a life insurance policy in place can be essential for producing income should a breadwinner die, but families do not have to rely on the proceeds alone. Indeed, many wealthy families are essentially self-insured, that is they have sufficient resources in place to cover their income needs even in the absence of a formal life insurance policy.
When determining how much life insurance coverage you might need, think about the amount of savings your family has and how much income that nest egg would generate. In the above example, the spouse earning $80,000 per year may be able to get by with a one million dollar life insurance policy if that individual also had substantial retirement savings or other assets.
Do You Have Minor Children?
The presence of minor children can complicate life insurance purchases for a couple of reasons. For one thing, a family with young children may choose to have one spouse stay at home for a time, at least until the kids are in school full time. In that case, the untimely death of the other spouse would cause a huge financial strain as well as leveling a devastating emotional blow.
In the absence of sufficient life insurance, the surviving spouse may have not choice but to return to work, and that could create a new set of problems, starting with difficulties surrounding affordable child care and after school care. For that reason families with young children may require more robust life insurance protection than their childless counterparts.
Couples may also need to revisit their need for life insurance following the birth of their first child. Even if they never needed life insurance before, the happy couple may want to consider it now that there is a new life to protect.
How Reliant is Your Household on a Dual Income?
Last but not least, life insurance shoppers should think about how reliant they are on each spouse's income. Some dual earners are able to pay the bills on one salary alone, banking the additional income and saving for the future. Others are not so lucky, and they must work paycheck to paycheck just to make ends meet.
If your family is reliant on two incomes to get by, buying life insurance is far more important. In that situation, the loss of one income, even for a short time, could have devastating consequences for the spouse who is left behind. It is important to consider this factor carefully when assessing your family's needs for life insurance.
For those who need it, life insurance can be a critical purchase. For those who do not, buying the coverage could be a waste of money that could be better used elsewhere. Determining what situation you are in can take some time and effort, but this is one decision you do not want to get wrong. Considering the factors listed above is the best way to determine how much life insurance you need, or if you need life insurance coverage at all.