How Much Life Insurance Should You Get?

Nobody likes to think about their passing, especially at a young age. This might be the reason why almost a quarter of US adults don’t have life insurance. But if you have dependents who rely on your income, it is highly recommended that you take out a policy to protect their interests. Although speaking to an insurance specialist before purchasing a policy is almost always the best way forward, you can start figuring out what you need on your own before then.

To determine how much insurance you should buy, you must take into consideration how much money your loved ones will spend after your passing and what debts they will need to pay off. Additionally, there are one-off expenses that shouldn’t be forgotten. Read on to find out how to calculate the amount of insurance you need and what policies there are.

How Much Life Insurance Should You Get? 

How much insurance you purchase is a very individual decision, and you should always consult a professional before purchasing a policy. It’s crucial to remember that your family’s future could depend on this decision. To protect them, you will need enough money to replace your income, get rid of debts, pay for the funeral and other end-of-life expenses, and pay for the children’s education.

Replacing Your Annual Income

The most important aspect to consider is your annual income, which will need to be replaced. A good way to begin is to calculate your expected future earnings over the years. But depending on your family’s current financial situation, you might not need to purchase insurance for the entire amount. For example, you could deduct any money you save and the money that goes into your retirement accounts.

Similarly, you’ll need to think about your spouse’s earnings. What percentage of the family expenses does their income cover? Would they be likely to increase their earnings after your death, or would they struggle to provide for the children on their own? By considering all these factors, you can make an accurate estimate of which part of your income needs to be replaced.

Considering the Timeline

A person in their late 20s or early 30s who has just had children needs to take out much more insurance than someone who is in their 50s and has teenage children. When making your calculations, consider whether some of your dependents might become independent in a few years.

If so, you can decrease the amount of insurance you need to purchase. You can also lower the total value of your policy if you are expecting to receive money from a pension in a few years.

Don’t Forget About Debt

Unfortunately, the day-to-day expenses are only one part of the equation. Many people have a significant amount of debt, and this could put a burden on their loved ones if they pass away. Add up all the money you owe and consider whether your relatives could pay this off on their own or not. Don’t forget to include your mortgage, car loan, personal loans, and credit card debt.

Consider Additional Factors Like Education

Sometimes, your current expenses don’t reflect your future obligations. For instance, many families want to provide their children with the best education possible, so they pay for private school or college. How would your spouse come up with the money for this should you pass away? Would your children need to take out student loans? If so, you should add expenses related to education to your total life insurance amount.

There might be other big bills on the horizon. Consider how often your spouse would need to purchase a new car, pay for home maintenance and repairs, visit a doctor’s office or hospital, or move to a different home. Since a family’s expenses don’t tend to remain static over time, all these expenses could fluctuate and should be factored in.

Consider End-of-Life Expenses 

When you pass away, your family will have to pay for your cremation and burial. What’s more, there could be hospital bills if you were ill or injured. Experts estimate that the cost of dying in the US is almost $20,000. This expense can come as a shock to the system, especially if your family isn’t prepared for it. Consider increasing your insurance amount or making provisions for your end-of-life care.

You could take out specific burial and funeral insurance or pre-plan your funeral at the mortuary. Either of these options can reduce the burden on your loved ones and allow them to grieve without worrying about their finances.

Some Rules of Thumb 

If you don’t want to spend several hours going through your income and expenses, you can use a rule of thumb. Many experts believe that families are adequately protected with an insurance policy that covers ten times their income. This could be a good starting point, but you should always consider your individual situation. For instance, you might need to add $100,000 for each child’s college tuition.

Additionally, someone in their 30s who hasn’t had the time to save any money might require more insurance because their expected lifetime earnings are still very high. On the other hand, someone aged 55 with significant retirement savings is only expected to earn money for another five to ten years, so they could choose a lower amount.

What Types of Insurance Are There?

There are various types of policies that fit the needs of different people. The most common ones are term insurance, which ends after a specific time period, and whole or universal insurance, which can cover you for the duration of your life. Additionally, there are also policies for specific events. For instance, you could take out burial or funeral insurance, which pays for your final expenses.

Similarly, you can get mortgage insurance to help your relatives pay off the mortgage, or you can get credit insurance to cover a specific kind of debt. If you’re not sure which policy is suitable for you, you should speak to an insurance advisor. They can analyze your situation and let you know what your options are.

Term Insurance

If you have a specific kind of debt your family wouldn’t be able to pay off without you or you would like to replace your income until retirement, term insurance is the best option. It is time-limited, so your policy usually ends after 5, 10, 15, 25, or 30 years.

Because this type of insurance doesn’t cover your whole lifespan, it is much cheaper than the other options. You’re likely to outlive your term insurance, so any money paid to the insurance company will be lost. Despite this, it can provide you and your loved ones with peace of mind.

Whole or Universal Insurance 

Both whole and universal life insurance can cover you for your entire lifetime. When you opt for the former, you build up a cash value over time, which will be paid out to your loved ones when you pass away. This is a great option for people who would like to use their insurance policy as a savings account for their family. However, it is more expensive than term insurance, and you usually have to keep it for the rest of your life to prevent putting your cash value at risk.

Universal insurance works in a similar way, but it generally offers fewer guarantees than whole insurance and is therefore cheaper. There are various policies available, so you should speak to your advisor if you’re interested in universal insurance.

Finding the Best Policy for Your Needs 

As you can see, anyone with dependents or a large amount of debt could benefit from an insurance policy that protects their loved one’s interests. But since there are so many different companies and types of policies, it’s hard to pick the best one. Working with a specialist could be the easiest way of finding insurance that suits your family’s individual needs.

You can get in touch with us at ISU Armac by filling out our contact form on the website. The more detail you provide during the initial email, the faster we can help you. Let us know why you are looking for insurance, whether you have dependents and debts, and what your monthly budget is. We will give you a call to discuss the options in your local area.

Almost everyone who has dependents such as a stay-at-home spouse and children should get life insurance. This type of policy protects the interests of your loved ones and helps them avoid financial trouble should you pass away prematurely. Often, it can be hard to find the best policy on your own, so working with an experienced insurance specialist is important. Contact us now at ISU Armac Insurance Services to discuss your situation with our experts and find the best policy for your family.

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