How Much Life Insurance Do I Need?

How Much Life Insurance Do I Need?

All it takes is a couple minutes of searching online about life insurance until you realize this, there is a ton of information available. Countless guides and descriptions abound, some funded and others not. Its like asking a seemingly simple question and immediately being answered by twenty different people with twenty different dialects and twenty different intentions. Think of this article as a personal conversation instead of a party full of answers. I want to give you the information you need and word it in an understandable manner. After you have read this article, you should be able to know how to answer the question yourself, “How much life insurance do I need?”

I’m going to break this article down into parts, the first one being, “What is life insurance?” The second part being “Why do I need life insurance?” and the third being, “How much life insurance do I need?”. After you have read these three parts you will have the knowledge and tools to decide what kind of life insurance fits you and how much you need. Without further ado.

What Is Life Insurance?

Car insurance insures your car, so if you are in an accident or it is destroyed you receive a payout. Life insurance is the same thing, except it insures your most valuable asset, your life. So if you pass away, your dependants will receive a payout. Just as there are different options about car insurance, there are just as many options about life insurance. In theory, life insurance works by paying a sum of money, called a premium, every month for a set amount of time, then once you pass away your dependants will receive a payout. This is ideally how life insurance works, but it is often more complicated than that.

How Much Life Insurance Do I Need?

There are four common types of life insurance:

  1. Term Life Insurance: The simplest form of life insurance. You purchase coverage for a specified duration of time. If you pass away during that time, your dependents receive a payout, the value of the policy.There is no investing involved with this option.
  1. Whole Life Insurance: Much like the term life option, but instead of lasting for a specified duration, whole life covers the duration of your life. Your premiums remain level throughout the policy. There is investing involved with this option.
  1. Universal Life Insurance: With universal life, you choose how much you would like to put in over the minimum premium. The company chooses where to invest the money. Your investment and returns are placed into a cash value account. There are typically two options regarding the payout. With type I, the cash amount goes towards the face value of the policy. With type II, the beneficiary receives the face value of the policy plus most of the cash account.
  1. Variable Life Insurance: Variable Life is much like universal life except you can choose where the money is invested. You can choose to have the returns go against the policy premium or allow them to build in the account.

With so many options available, its easy to become confused and worry that you may pick the wrong one. That’s why it is important to speak to a representative for your chosen life insurance company. A representative will walk you through these options and help you figure out which one will be best suited for your situation. If you don’t like what the representative is saying or the offers are unappealing, then find another company. There are so many life insurance companies, one may fit the needs of one person and fail to satisfy the needs of another. That’s why there are so many to choose from. Be picky and shop around before you settle for any one of them, life insurance is a large commitment.

Why Do I Need Life Insurance?

There are many reasons people apply for life insurance. The main reason anyone applies for life insurance is to replace earnings that would be lost upon your death. If you pass away during your earning years then your family will be left with little or no source of income to pay for bills and funeral services. The payout can be used for mortgage payments and living expenses. So as you can see, life insurance is very useful.

For individuals who own businesses, life insurance can be very beneficial. It can be used to protect the business upon your death. For instance, if you apply for a term life insurance policy and pass away during the policies term, your beneficiaries will receive the payout, that beneficiary can be a business partner or a spouse. That is practical if you are planning to stay in business for a set period of time, but if you aspire to stay in business for your entire life then a permanent life insurance policy will be better suited for your needs.

Another option business owners can choose is to apply for life insurance policies for their employees. This guarantees that if that employee passes away, the profits they generate will be insured for the time it takes to find another person to fill that position. Some good questions business owners should ask themselves are:

If you pass away, how will your business:

  • Thrive after you are gone?
  • Does your business need a financial cushion to protect it?
  • If one of your most valuable employees pass away, how soon can their position be replaced.
  • Would a sum of money be useful to fill the earnings loss if one of your important employees pass away?

Individuals who do not need to protect a business have many reasons to apply for life insurance. If you are the bread winner of the household, life insurance is very important. If you were to pass away, your family or those reliant upon you would be left with nothing. Life insurance can supply these dependants with needed funds to sustain their living expenses, mortgage or rent payments and other bills that will be left. Another reason many apply for life insurance is to guarantee payment of property taxes after death. Here are some things to consider.

If you pass away, how will your family pay for:

  • Mortgage or rent payments.
  • College and education costs.
  • Property taxes.
  • Car payments.
  • Living expenses like food and sundries.

If you think about these expenses and have no other but yourself to pay for these, then life insurance may be a good decision.

The main questions you should ask yourself when thinking about life insurance are as follows. How will your family survive if you pass away untimely? How will your business thrive if you pass away? If you have children, how will they pay for college if you pass away untimely? Those are the reasons people apply for life insurance, and those are the reason you need life insurance.

How Much Life Insurance Do I Need?

Now that you have been informed about what life insurance is and why you may need it, it’s time to ask yourself how much you need. It’s true that some individuals need very little life insurance, and other need much more life insurance. Those who have families to care for need a strong amount of life insurance, while single individuals with no dependants or people relying on them may need little to none. First ask yourself the questions above, then think about what kind of bills and debts you have.

After you have asked yourself these questions, you should have a good idea of how much life insurance you need. Remember, life insurance can be a good way to eliminate outstanding debts and even pay off a piece of property, securing it for your dependants. Single individuals may even benefit from life insurance, especially if they have a favorite charity organization or want to make sure that their funeral costs are paid for.

Things single individuals should think about:

  • Who will pay for your funeral costs?
  • Would you like to leave your favorite charity a sum of money?

Things individuals with families should think about:

  • How much will your children’s college expenses be?
  • Do you have any debts you would like to pay for so your family does not have to deal with them?
  • Do you have a favorite charity to leave a sum of money for?
  • How well will your spouse live if you pass away?

Things business owners should think about:

  • How will your business function if you pass away?
  • Do you have any important employees in your business?
  • How would your business function if those employees pass away?

As you can see, there is no fits all life insurance option. Something to consider when asking yourself how much life insurance you need is whether you need term or whole life insurance. Term life insurance can have some high coverage amounts, but is practical only for those who need to be covered for set periods of time. Whole life insurance covers an individual for their entire life, so long as they pay their premiums.

How Does Term Life Insurance Work?

Term life insurance works by the assumption that the older you get, the less life insurance you need. A middle aged worker may need a long policy term and a high payout because if they pass away, there will be dependants left with nothing otherwise. A worker who has already retired and has very few dependants should need very little to no life insurance, there is no one relying on them.

A health examination is required before you are accepted for a term life insurance policy. If you have poor health, your premiums will be higher. If your health is very bad or you have a life threatening disease, you may be deemed uninsurable. If you are seeking further coverage after your term life policy ends, you will have to undergo another physical examination. This second exam may show your health to be worse than the first exam, thus raising your premiums. Term life may have less expensive premiums, but its policy is transient.

How Does Whole Life Insurance Work?

Whole life insurance is similar to term life, but the policy is effective as long as you pay the premiums. A whole life policy has a determined face value, but there is also an investment component involved with it. Money you put into the policy past the premium costs will be invested and returns will be placed into a cash value account. Many companies have the option to allow this account to go against your premiums or to build in value.

A health examination is required for whole life insurance also. Applicants for whole life insurance usually need only an initial health exam, so their premiums throughout their life will reflect upon this initial exam. Since the policy term does not expire so long as you pay your premiums, your premiums will not increase if your health declines.

All other life insurance options are comprised of these two types. The insurance is either transient, meaning it expires after an amount of time or they are permanent, lasting your whole life. You have to decide which one will best suit your needs and the needs of your family or business.

Now that you have asked yourself, how much life insurance do I need, the next step is to contact a chosen life insurance company and ask them your questions. Some of your questions may be answered without the need of an advisor and others will require speaking to one. If the answers you are given are unacceptable, you should move on and question another company. Some companies offer more options than others, and some specialize in insuring those who have been denied elsewhere. Be critical and shop around, there are a lot of companies to choose from.

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