My wife and I have life insurance policies that are part of the benefits programs with our employers. The policies provide death benefits equal to our annual salaries. Is this enough and if not, how much do we need? Also, what type of life insurance policies should we consider?
Protecting your family against the financial consequences of your death should be part of your total financial plan. The decisions you need to make are:
- How much life insurance do you need?
- What type of life insurance should you buy?
- Where should you buy your life insurance?
No one likes to think about dying and as a result, many individuals put off making these decisions. Here are some guidelines that can make the process easier.
How much life insurance?
Some individuals use life insurance as part of sophisticated estate plans. For most people, life insurance is simply a way to make sure their spouse and children can continue to have a decent lifestyle if they die prematurely.
Single individuals, or married individuals with working spouses, may find their real need for life insurance to be low or non-existent. If no one is dependent on your income to maintain their financial independence, you should carefully consider whether spending for life insurance is the best use of your funds. It could be that your savings and investments will be sufficient to provide survivors with financial security.
If others are dependent on your income, life insurance should be part of your financial strategy. There are many complex ways to calculate the amount of coverage you should consider that take inflation, debts, children, retirement plans and estimated investment returns into account.
If you want that type of calculation, try some of the insurance websites. If you want a simpler approach, consider that many insurance experts say that a “primary breadwinner” should have coverage equal to six to ten times income. For example, if you have income of $75,000, you may want to have life insurance policies providing $450,000 to $750,000 of death benefits.
If you have young children, dependents with special needs, large debts or other special considerations, you may want to be on the high end of this range (or above). For example, if you expect a child to attend a private college, the annual costs could be over $40,000. To cover those expenses, you may want to increase your coverage by some multiple of the annual cost to cover four years of college and to take potential inflation into account.
What type of policy is best for you?
The two basic types of life insurance policies are – term and cash value whole life. Term insurance is just pure protection, payable on the death of the insured and is cheaper. Cash value whole life policies provide death protection and have a “cash build up” feature that acts somewhat like a tax-deferred savings account. Usually, whole life insurance is much more expensive. The accumulated “cash value” can also be the source of low interest loans for the policyholder.
When evaluating these types of policies, be sure to consider all the costs, the amount of death benefits and ask for a history of what the level of earnings on the “cash value” the insurance company has paid previously. You may find that it makes sense to “buy term and invest the rest.”
Where can you find life insurance?
The first place to begin is with your employer. The rates on these types of group plans are often very attractive. You mentioned that you currently have coverage equal to your annual salaries. If you can get additional coverage through your benefit program, you may be able to get the coverage you need at a very good price.
If you need additional coverage, determine whether you need the consultation services of an insurance agent. Many financial institutions offer insurance through their investment departments and have both term and whole life policies available. Many insurance companies also offer policies directly to consumers through their websites.
If you are considering life insurance as part of a sophisticated estate plan, it may make sense to search out the services of a dedicated insurance agent.
In any case, be sure to ask questions and get the coverage amount you need with the type of policy you want. Investigate the insurance company and be sure to choose a reputable company. The agent should have ratings reports available on the insurance company. Many public libraries also have these ratings available.
Few people like to think about dying or the need for life insurance. Be sure your financial plan provides the protection your family needs.