Life insurance is an essential component of nearly all financial plans. Having this coverage in place can help to protect income, and to keep assets in place – where they belong – in case of the unexpected.
Yet, prior to purchasing a policy, it is important to know how much coverage will be necessary, as having too much or too little life insurance can turn out to be an irreversible financial mistake. This is something that survivors don’t want to discover after it’s too late.
Evaluating Your Life Insurance Needs
The proceeds that are received from a life insurance policy can be used in a variety of ways, depending of the purpose of the coverage. With that in mind, it is wise to estimate how much would be needed for survivors or beneficiaries going forward.
Unfortunately, many people far underestimate how much their loved ones may need in the event of their death. While there are several “rules of thumb” such as simply purchasing a policy that is double the amount of your annual income, this typically has nothing at all to do with the amount of coverage that a person actually requires.
Rather, when determining an appropriate amount of life insurance, you will be much better off considering actual financial needs of what it is you are covering. For example, if the policy will be purchased to cover final expenses, it’s a good idea to do some research on just how much you may need. In this case, the average funeral today is estimated to cost around $9,000. (1)
Likewise, if the policy will be purchased to replace income for a spouse and children in the event of a breadwinner’s death, there are a number of factors to keep in mind, such as the amount of annual income to replace, as well as how long that income would need to be replaced. In addition, rising future inflation must also be considered.
As Your Life Changes, So Should Your Life Insurance Coverage
It is also important that as your life changes, so should your life insurance coverage. This is especially the case as your family expands and your current – and future – expenses tend to increase. Future college and wedding expenses should be allocated for, as should ongoing living costs like maintaining the family home, utility payments, and the cost of food and clothing. It all adds up.
By reviewing your current coverage at least once per year, you can determine whether or not any additional life insurance should be purchased in order to cover your expanded business or personal needs.
Taking the Next Step
While coming up with an approximate amount of necessary coverage is a good start, it is always a good idea to meet with a life insurance professional prior to actually purchasing a policy. This way, you will be able to obtain a more accurate figure, as well as determine what type of life insurance protection may be best for your specific situation and needs.