Determining If You Need Life Insurance Coverage
If anyone depends on your income and would struggle financially after your death, you most likely need to purchase life insurance. A life insurance policy would provide your family or dependents with money after you’re gone to make sure they are able to take care of your funeral costs, living expenses, and other financial responsibilities that they relied on you for.
If you provide the majority of your family’s income, ask yourself this question: if something were to happen to me, how would my family afford to pay for such things like daily living expenses, monthly mortgage or rent, and education? Basically, would they be able to afford to continue living the way they have, or would they suffer without the income you contribute?
If You’re Single:
If you’re young, single and have no independents, it may not seem like you need life insurance because no one relies on your income or would suffer financially without you. However, there are a few factors to consider if you are single. For example, you may be providing financial support to a friend, aging parent, sibling, or significant other – and you wouldn’t want these people to have to pay for your funeral expenses or be responsible for student loan payments, car payments, and other debts. Plus, when you are young and healthy, you will receive the best rates possible because the likelihood that you will die is much less when you are younger. Purchase a policy at a younger age to lock in low rates and eliminate having to qualify for coverage when you’re older and possibly not as healthy.
If You’re Married:
Married couples share many financial responsibilities together, including rent or mortgage, car loans, and credit card payments. Even if you aren’t planning on having children anytime soon, if you’re married, a life insurance policy is important because it would make sure that your spouse is taken care of after you’re gone. You wouldn’t want to leave your spouse with the burden of paying off all of your debts plus future expenses, especially if they are used to living off your combined income.
If You’re Married & Have Children:
If you are married with children and you died unexpectedly, would your spouse’s income be enough to cover your funeral and all of your family’s basic living expenses? What about future costs such as your children’s health care or college education? Life insurance protection allows you to take the necessary steps to make sure your family maintains their financial stability now and in the future.
If You’re a Single Parent:
As a single parent, you are the sole provider of income for your children and without you, they would not be able to support themselves financially. Purchasing a life insurance policy is essential to making sure they maintain their quality of life after you are gone.
If You’re Retired or with Grown Children:
As you become older and your children grow up and start families of their own, you may not think that having life insurance is as necessary as it was when you and your family were younger. However, your retirement savings, pension plan, or social security may not be enough to sustain your spouse, especially if they outlive you by many years. With life insurance, you can take action now to preserve your spouse’s financial future.
If You’re a Small Business Owner:
When most people think of life insurance, they think of a product that protects your family’s financial future, but life insurance can be used to protect your business’s future as well. If you are the owner of a small business, you must consider what would happen to your business if you or one of your business partners or key employees suddenly died. How would your business keep moving forward? Would someone else take over the business for you, or would you leave your share of the business to a co-owner or partner? Life insurance policies can be structured to safeguard your business’s future too.
How much life insurance do I need?
Determining how much life insurance coverage you need means trying to determine how much money your family will need for the future. As a general rule, you will want to carry coverage of at least 10 times your current annual salary, but 15 to 20 times is recommended. However your family may require more or less, depending on your specific situation and financial needs.
After your death, your family will have to deal with immediate expenses such as funeral and burial costs, medical bills, estate-related costs, and many other financial obligations. Consider these immediate expenses when determining how much coverage you should buy. Life insurance will help your loved ones take care of these expenses right away, but their long term needs are more difficult to calculate.
When trying to figure out how much life insurance you should buy, you need to determine how much money your family needs to maintain their standard of life for years to come. To do this, first take inventory of all of your current financial commitments and any possible future obligations your family will have to deal with. These items may include mortgage, car payments, health care and college tuition.
Then, compile a list of all the financial resources your surviving family members will have access to, such as their own salary, savings, investments, property, and any life insurance that you already own. Next, subtract these resources from your total current and future financial duties to help determine how much money your family may need. Also ask yourself: for how long will my family need to receive benefits? For 10, 15, or 30 years?
Formula: current & future financial obligations minus existing resources (savings, assets, investments, life insurance you already own) equals the amount of life insurance you probably need
Some expenses to consider:
Immediate expenses:
Funeral and burial costs
Medical expenses
Estate-settlement costs
Taxes
Outstanding debts:
Mortgage
Car payments
Unpaid student loans
Credit card balances
Any other outstanding debts
Family-related future expenses:
Surviving spouse’s annual living expenses & years needed
Children’s annual living expenses & years needed
Childcare & years needed
Annual education expenses & years needed
How are life insurance quotes calculated?
Life insurers calculate quotes by determining your mortality rate, or the likelihood that you will die within a specific period of time. Mortality rates are based on mortality tables that use probability and statistics to create a life expectancy estimate. There are 4 main factors that help insurers calculate your mortality rate: age, gender, nicotine use, and overall health condition.
• 1.) Age
• 2.) Gender
• 3.) Nicotine use
• 4.) Overall health condition
Age
Age is used to help determine your life insurance premium because the older you are, the chances that you will die become greater. Remember, your life insurance rate will never be as low as it is today, since you can never predict what will happen to your health in the future.
Gender
Because mortality statistics vary between men and women, gender is one of the primary factors used to determine life insurance rates.
Nicotine Use
Sorry smokers, but if you use nicotine products, you increase your chances of many medical problems such as cancer or heart disease, which increase the likelihood of death. That’s why rates for nicotine users are higher than for those who do not smoke. If you do use nicotine products, it is important that you let your life insurer know because they may refuse to pay your death benefits if you fail to disclose that you do smoke.
Overall Health Condition
Finally, the last of the four primary factors that determine your rates is your overall health condition. This includes your family’s health history, your own personal medical background, and your current health conditions at the time the policy is issued, based on your required medical exam.
