For any American looking to purchase their first life insurance policy, or even later, choosing the right amount is not a black and white decision. There are many things to consider, especially when there are dependents, a business, or even an estate to plan properly.
Life insurance death benefits can range from $ 5,000 to virtually any amount, as long as a carrier or group of carriers are willing to offer it. Consumers can choose a nice round number like $ 250,000, or a very specific amount like $ 813,767. In any case, the idea behind finding the right amount is to account for all possible obligations, and not a penny more, to pay the least amount of premium possible while fully protecting yourself and your family.
SO HOW MUCH LIFE INSURANCE DO I NEED?
With a pencil and paper handy, the best way to start is to start making a list of all the people who depend on you, all the debts you owe, and a basic period of time for how long each one may need. Here are things to consider:
- Replace your income to your dependents for a certain number of years
- Pay off debts, such as mortgages, student loans, credit card bills, or business loans
- Pay upfront for your children’s biggest expenses, like college
- Donations to charities, organizations, churches, and universities if you had plans to do so.
- Taxes, like inheritance or inheritance taxes
- Burial or cremation costs, and possibly additional income for medical bills
By listing just those, you’re likely to get a completely different number than your friends or family. Each person evaluates their plan in a different way, both based on the need and what they want to provide in case something happens.
Even if you accurately compiled a list and final number, you have more work to do.
Then, it’s time to consider what you currently have, which could reduce your need for death benefits. Some people don’t like to include them because they can change dramatically, but items like current savings, IRAs and 401 (k) s, pensions or social security benefits (if not joint), and other valuables could be subtracted from the total you
Also, consider any insurance you have now. You may have a plan through work, a supplemental policy attached to a health insurance policy, or even private insurance that you previously purchased for another purpose. These can also reduce the amount you need, as long as you can count on the fact that they will be available as life changes occur, such as changes in occupation.
MORE IN DETAIL
If you weren’t sure about any of the items above, we’ll be more specific about each one so you can understand what you need to replace and what the actual dollar amount might be. Again, each situation is unique, so take the time to calculate the required death benefit to ensure the best possible care in case your beneficiaries need to file a claim.
The biggest item that most people have to protect is their human capital. Basically, human capital is the amount that you could earn throughout your life, assuming a stable career during a normal period of work. For younger people, this could mean replacing a large number of years of income.
People in their 20s have the longest period of time to replace, but obviously trying to guess retirement age and salary during that period is unlikely to be accurate. Rather, the most common method is to multiply your current or expected income by a variable of 7 to 12 years on average. The best insurance companies will allow earnings of up to 30x-40x, but this is probably too much for the average person, except for several reasons.
Even if it doesn’t work, there may still be a real monetary value to replace. Take a mother who teaches her children at home, for example. While you may not be receiving a paycheck, it provides real value to the family that the husband may have to pay to continue her normal job if something happens to her. Otherwise, life-altering changes would be required to account for new responsibilities that would reduce your own income.
Most Americans have some form of debt. Whether it’s student loans, credit cards, or mortgages, there is a good chance that you owe someone something and, in the event of death, these debts can overburden your dependents, spouse, or business. The key is to provide enough immediate cash for payments or full settlement of all types of transferable loans.
Not all debts will be transferred to someone else, but everything jointly signed, debts shared between spouses, or outstanding business-type loans are generally considered someone else’s responsibility when the primary lessee passes before the obligation expires. If you have any questions, call the lender to see how you would be treated if an early death occurs.
Rarely chosen, but still an option, you are allowed to have an additional death benefit designated to pay for your children’s college expenses. Even if you are not sure that your children will attend further education beyond high school, it could still be considered a gift for them, either as you like or at your suggestion.
Just be careful how you allocate the income that could go to a minor. Even if the intentions are great, simply naming them without contingencies in a will or trust, especially without naming someone as guardian of the assets, can complicate the situation for both the person responsible for the child and the child himself.
Donations and charitable contributions can also be made with the payment of a life insurance policy. This is a great way to not only leverage current cash in the future, but there are tax advantages to doing so for both you (or your estate) and the recipient of the funds.
Churches, fraternal organizations, universities, charities, and other nonprofits are the most common. As with minors, you can stipulate exactly how the funds are used, for what cause, and what the ultimate purpose of the funds is.
Some life insurance policies are strictly for burial, long-term policies must add the appropriate amount of funds to pay for what is considered final needs. Final needs are burial costs, but also unexpected costs, such as medical bills, travel expenses, or arrangements. Burial insurance policies range from $ 5,000 to $ 25,000, any amount could be allocated here, within reason, depending on the type of funeral or cremation you intend to have. Having life insurance reserved for this purpose is the cheapest way to pay, instead of paying with savings, buying prepaid packages from a funeral home, or other prepaid methods.
Most citizens do not need to worry too much about this area, those with larger properties should meticulously plan property taxes if possible.
Estate planning is a very complicated process, which generally requires both a tax attorney and an accounting professional. The letter of the law must be correct, especially when life insurance policies or their earnings are held within irrevocable trusts. Properties that transfer other types of assets, such as real estate, business property, or other non-cash items, can also complicate matters. In most cases, it might be best to consider estate planning with a separate life insurance policy.
HOW MUCH IS ENOUGH?
Just enough. Never buy more than you need, except if it allows you to take advantage of a price discount. If you need $ 490,000 coverage, buying a $ 500,000 policy would actually be cheaper due to interruptions in pricing models for most companies. This is the same for choosing how long to secure your rates, too. A 10-year obligation needs no more than a 10-year life insurance policy to save maximum dollars in premiums.