According to a recent study by LIMRA, 31% of adults are now much more willing to purchase life insurance in the next 12 months. The COVID-19 pandemic has indeed made people much more perceptive about their life insurance needs.
Why Do You Need Life Insurance?
If you have dependents that primarily rely on you, or if your debt is bigger than your assets, you can ensure your dependents are provided for financially even when you’re no longer there to support them by purchasing life insurance. Having life insurance is also useful if you’re a business owner or if you have cosigned debts.
How Much Life Insurance Do You Need?
While considering the available options, you should first figure out the amount of life insurance that is ideal for you. Your life insurance’s face value (the amount your insurance pays if your pass on) should be hinged on various factors that are unique to your circumstances and needs.
Here are some of the factors you should consider when deciding on the amount of life insurance you need:
Amount of Outstanding Debt – Your life insurance can be channeled towards paying your outstanding debts, including mortgage, credit cards, personal loans, car loans, and student loans. If you have any debt, your policy’s face value should be enough to pay it off fully. For instance, if you have a $5,000 car loan and a 150,000 mortgage, at the very least, you need a policy with a face value of $155,000. However, you should also consider the interest. Your policy’s face value should be enough to cover any charges and extra interest.
Income Plus Potential Inflation – If, for instance, your dependents sorely rely on your financial support and you earn $60,000 annually, you’ll need a life insurance policy with a face value that is enough to cover your income and inflation. Assuming your policy payout is invested with an 8% rate of return, to replace your income, you’ll need a policy with a $750,000 face value. While this is not a fixed rule, you should consider adding your annual wage to the policy payout to guard against inflation. In this case, add $60,000 to the $750,000 payout to make it $810, 000.
Need to Insure Others – There may be people in your life who are dear to you and whose passing away would affect you at all levels. The rule of thumb is to insure such individuals whose passing away will result in a severe financial setback for you. For instance, the death of an income-earning spouse can cause both financial and emotional loss. In this case, you can use the income replacement calculation (actual income plus potential inflation) to figure out the ideal policy payout. This also applies to business partners or others with whom you share the responsibility of paying a mortgage for a co-owned property.
How to Calculate the Ideal Life Insurance Coverage Amount
To calculate the ideal amount of coverage, deduct the sum total of your financial obligations from the sum total of available assets.
Examples of financial obligations include:
- Income Replacement: This is calculated by multiplying the annual income by the number of years you want the income to be replaced.
- Mortgage payments, if any
- Children’s college tuition
- Other large debts
Some of the assets you can use to cover your financial obligations include:
- Existing life insurance
- College 529 savings
- Burial insurance
These are a few things that you need to keep in mind while calculating the amount of life insurance coverage that you ideally need. For more questions related to your personal insurance needs, contact our experts at Spotlight Insurance Agency today!