Life Insurance: How Much Coverage Do You Really Need?
Ah, life insurance. It’s not a fun topic; it conjures up images of complicated paperwork and it sounds..boring. But if you’re dealing with estate planning, the issue of life insurance is always going to pop up. So let’s break this down over a virtual coffee (or wine, I won’t judge). To keep it simple, you can click on each link to below to read about the basics of life insurance.
Why Bother with Life Insurance, Anyway?
Imagine, for a moment, you’re the main character in a movie. Picture this: If you were to unexpectedly exit stage left (y’know, kick the bucket), what would the storyline be for those you left behind? Drama? Romance? Financial horror? Life insurance is basically your way of ensuring your loved ones get a feel-good, everything’s-going-to-be-alright kind of movie instead of a nail-biting thriller. Life insurance provides a financial cushion for your loved ones if something should happen to you. Let’s break down life insurance for you, in the form of a romance-horror thriller.
Rule of Thumb: The Classic 10x Salary Guideline
You might have heard financial wizards say, “Just get a life insurance policy that’s 10 times your annual salary.” Easy-peasy, right? If you’re earning $50,000 annually, you’re looking at a neat $500,000 policy.
But let’s be honest, life (and death) isn’t a one-size-fits-all situation. So while this rule is a good starting point, there’s more to the story.
Digging Deeper: Future Obligations and Expenses
1. Debts: Think mortgages, car loans, student loans, credit card debt…you get the picture. Your life insurance policy should cover these so that your family isn’t saddled with your debts.
2. Funeral and Final Expenses: Funerals can be costly. And by costly, they could range anywhere from between $7,000 to $10,000 on average. That’s a lot of cheddar for a final farewell.
3. Children’s Education: Do you have kiddos? If you want them to get a degree without a side of student loan debt, factor in those future tuition fees.
4. Day-to-Day Living Expenses: Your salary might be gone, but daily expenses like groceries, utilities, and Netflix subscriptions (because, priorities) still roll in.
Considering Current Assets
“But wait,” you might be thinking, “I already have some savings and investments. Do they count?” Absolutely! If you’ve got a good chunk of change in savings, investments, or other life insurance policies, subtract these from your estimated needs. After all, you’re trying to fill a gap, not build a mountain of gold.
Adjusting for Inflation and Changing Circumstances
The future is as unpredictable as next year’s top hit single. Remember to add a buffer for inflation, especially if you’re looking at a 20- or 30-year term policy. And life is full of twists and turns: marriage, more kids, a bigger house. It’s worth revisiting your policy every few years to ensure it’s still a good fit.
Toss in the Intangibles
This is where it gets a bit emotional. Some folks want their life insurance to cover more than just the basics. Maybe you dream of leaving a chunk of money to your favorite charity or ensuring your spouse can retire without a worry. Or perhaps you want to leave a legacy fund for your kids and future grandkids. These aren’t definite expenses, but they’re worth considering.
So…How Much Life Insurance Do You Need?
We’ve covered a lot of ground, haven’t we? While that 10x salary rule is a solid starting point, everyone’s number will be a bit different based on individual circumstances. Think of your life insurance as a safety net tailored just for you and your family.
Here’s a quick formula to get you started on calculating how much life insurance you’ll need:
(Annual salary x 10) + (Future obligations and costs) – Current assets = Rough estimate of how much life insurance you need.
Then, once you’ve got a ballpark figure, we can chat and determine the right policy and the right amount that will suit your family’s needs.