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Unfortunately, there is no way to avoid the inevitability of dying and leaving your loved ones behind to fend for themselves. Having the right amount of life insurance is the best way that you can ensure that your family (who depend on your income for their housing and other needs) can have an adequate amount of money available to cover not only their day-to-day living expenses and all outstanding debts including student loans but to also be able to cover all funeral and burial expense. Read on to learn more about how to make sure your family is protected upon your death and how much life insurance should you carry.
The right amount of life insurance for you depends on your family’s needs, your age, and your current level of debt and provisions for all final expenses.
Burial and all final costs include the cost of a casket (averaging from $2000 to $10,000), the cost of a burial plot (averaging about $6000), and the cost of the funeral (averaging from $1400 to $4500).
Life Insurance is the agreement between you and a life insurance company in which the company agrees to pay an agreed-upon amount (death benefit) upon your death as long as your premium payments are up to date.
There are two types of life insurance, whole life insurance, and term life insurance.
Whole life insurance provides life insurance coverage for you for your “whole” or entire life.
Some life insurance policies allow you to build cash value with your premiums used to invest in different modalities such as the stock market.
Term life insurance policies are usually less expensive than whole life insurance policies, may not require a medical clearance exam, and provides life insurance for a specified period of time running anywhere from twenty to thirty years.
Medical exams are usually required for most Whole Life insurance policies.
If you are not married and are not supporting a family and have no dependents to support and have adequate monetary resources to cover all of your debts and funeral and burial expenses including any necessary attorney’s fees, then you may not need to purchase life insurance at this time.
However, if you are the main financial provider for your family and dependents and have more outstanding debt than assets, then it is essential to have adequate life insurance coverage in place.
The right amount of life insurance coverage to provide for your dependents will vary from person to person.
Insurance experts usually recommend buying a policy that is from ten to fifteen times the amount of your annual income.
This amount includes being able to pay off any outstanding debts such as mortgages, credit card balances, auto loans, and student loans.
It also includes replacing the amount of your annual salary for the years up to your retirement (age 65) including adjustments for cost of living increases and inflation.
Therefore, if you have an annual salary of $20,000.00 and are forty years old, you will need $20,000 × 25 years or $500,000 in life insurance.
Another method to determine how much life insurance coverage you should get is called the “DIME” method.
In this method, D indicates all debt including final expenses and excluding mortgage, I indicates income, M indicates mortgage and E is for education expenses.
Take as another example a 40-year-old mother of two young children who wants a 30-year term life insurance policy.
She has a total yearly income of $50,000.
The remaining balance on her mortgage is $150,000.
She has $20,000 in car loans and credit card debt.
The costs for a funeral with a casket would be about $8000.
The cost of her 2 children’s college education would then be $100,000 × 2 or $200,000.
Therefore, the amount of term life insurance she should obtain should be: $50,000/year x 25 Years (years until retirement) or $1.25 million plus $150,000 mortgage remaining plus $20,000 debt plus $200,000 for children’s education plus $8000 final expenses for a total of approximately $1,628,000 as a face value for her term life insurance policy.
Some term policies have up to a 2-year waiting period for life insurance coverage while other policies provide full coverage immediately or within weeks.