How much life insurance does one person need?
Well, that depends. First, ask yourself, is life insurance ever about just one person?
If you have a family or people who depend on your income, life insurance can be a lifeline. Not that you expect anything bad to happen to you, but it is a good idea to prepare in case something does.
The hope is you already have life insurance and that the only question on your mind is, do you have enough of it?
Surprisingly, you might not.
102 million Americans know they need (or need more) life insurance coverage—the highest level ever. Lots of advice says you need life insurance that’s 10x your income. But that doesn’t account for your unique experience. You may need more or less depending on your debts, kids, a spouse, etc.
Maybe you relate to those 102 million Americans. If so, check out these six questions before deciding if you have “enough” life insurance to cover your family.
6 Questions to Answer Before You Make a Decision
Before you start, know that the answer won’t look the same for everyone. You need an insurance plan that fits your family’s present needs and future goals.
If you have an active policy, it’s also wise to know which type you have:
- Term = coverage that lasts for a set period
- Whole/Permanent = coverage that lasts a lifetime.
While the best coverage depends on your needs, many people benefit from term policies due to their low cost and flexibility.
Alright, it’s time to see if you have enough life insurance!
#1: Did You Account For Final Expenses?
Ensure you leave enough funds to accommodate funeral or burial expenses, end-of-life costs, or unpaid medical bills. If not, your family will be responsible for those payments, leaving them with a financial nightmare during an already difficult time.
#2: Do You Have Dependents, And If So, How Many?
Your life insurance needs will likely increase the more dependents you have. Do you have a spouse, kids, dependent parent, or relative? A common rule of thumb is adding $100,000 for each dependent on top of your base coverage.
Why so high?
The cost of living is really expensive. Here’s a quick example.
Do you plan on leaving money for your children’s college education? According to SoFi, about 83% of parents plan to help cover a portion of their child’s education expenses.
A more pressing concern is if you have set aside money for the typical child-raising costs, like healthcare, clothing, food, childcare, etc.—they add up quickly.
#3: Will Your Family Receive Enough To Cover Income Loss Or Debt?
According to LIMRA, “Forty-two percent of Americans say their household would face financial hardship within six months should a wage earner die unexpectedly— 25% would struggle financially within a month.” Don’t let this be you.
If you are the primary earner in your household, you’ll want to ensure that your family has enough funds to maintain their lifestyle.
Some examples might be paying off a mortgage, car loans, student loans, other loans, utility bills, etc. Another good example is if your spouse works part-time right now, could they maintain that, or would they have to return to full-time? If they do have to go full-time, is there enough to cover childcare, etc.?
#4: Did You Consider Your Retirement Income?
If you have permanent or whole life insurance, this point is for you. A benefit of permanent policies is that they come with a cash value component. This element grows tax-free and can be a nice complement to other retirement income sources, especially when the market is volatile.
Keep in mind that permanent life insurance isn’t suitable for everyone. Many families benefit from acquiring a term policy and investing the difference they would have paid for a permanent policy in the stock market.
#5: Does Your Insurance Coverage Account For Your Unique Situation?
Consider what makes your life unique and adapt your plan accordingly.
- Do you own a business? If you own it with others, do you have a buy/sell agreement? If you unexpectedly pass, it would be good to have your business affairs settled to streamline things for your loved ones and colleagues.
- Do you want to leave funds to charity or another cause? If you already have the basics covered, you may wish to donate some to a charitable cause that means a lot to you and your family.
- Are you a single parent? If so, making sure you have funds set up for your children could help them and their guardian not worry about money as they adjust to a new life together.
#6: What If Your Circumstances Change?
Who says life insurance has to be written in stone?
Many companies recognize that circumstances change and make it relatively painless to change or extend your term life insurance coverage.
Some term policies even have a convertibility clause, enabling you to change your term policy into a permanent one without getting a new medical exam. Something like this may be beneficial if you develop a chronic illness or have a serious injury.
Say you have a larger family than expected. In that case, you might want to increase your life insurance coverage to protect and support them.
What if your family has to deal with an unplanned event or emergency? Since you can’t know what will happen down the road, it is a good idea to have some wiggle room to adjust later. Work with your advisor to find a plan that works best for you and your family and leaves you with some wiggle room later.
To help you figure out what other issues you might want to consider when purchasing a life insurance policy, use our checklist to determine what your needs may be.
You Know Your Needs Best
As you’re reviewing your life insurance needs, consider the following:
- All your known present (and future debts)
- Your and your spouse’s work situation
- All your dependents (pets included!)
- Your household income and your personal income
If you don’t have a brand-new car or mortgage payment, your needs for covering your assets are likely different than someone who carries significant debt. Understanding your unique situation will help you make a comprehensive coverage decision. Learn more about the factors you should consider before purchasing your life insurance policy in the chart below.
Remember, life insurance is a risk management tool that can help financially protect your family should something happen to you. Planning ahead gives peace of mind for the days to come.
Looking for a little help navigating the insurance path? Give us a call today so we can help you achieve peace of mind.
The contents of this article are for general information and educational purposes and should not be construed as specific investment, financial planning, tax, accounting, or legal advice. Please consult with a professional advisor before taking any action based on the contents of this article.
All investment and financial planning strategies involve risk of loss that you should be prepared to bear. We cannot guarantee any investment performance whatsoever, and past performance is not indicative of potential future returns.