How Much Life Insurance Do I Need?
Life insurance should replace your income if the unthinkable happens. When figuring out what you need for life insurance coverage, consider your future costs. That includes your mortgage, outstanding bills, children’s college, funeral costs, childcare, and other costs that your loved ones will have. When gauging how much you need, here are some costs to think about:
Estimate for at least five years of income replacement. So, if your income is $100,000, it’s wise to buy at least $500,000 of life insurance just for income replacement.
Provide enough funds so that they can pay the mortgage and any regular costs like childcare. If you’re the primary caregiver, you’ll still want a policy to help pay for childcare.
The average annual cost of tuition and fees is about $35,000 for private colleges, close to $10,000 for in-state students at public colleges, and approximately $26,000 for out-of-state students at state universities. Remember to times whatever number you choose by at least four to represent four years of college.
The average funeral costs are more than $8,000. Add money to your policy to handle those costs and remember that funeral costs increase annually.
Once you figure out those costs, you’re able to get a better gauge of what your loved ones will need.
Types of Life Insurance
Permanent Life Insurance
Permanent life insurance provides coverage for life - no matter how long you live. You have coverage as long as you make your premium payments. Permanent life is usually more expensive and offers lower death benefits than term life, but you’re guaranteed that your loved ones will get a death benefit. Permanent life also provides cash value. You can borrow from your policy, but you should only tap into it for a one-time emergency. Your policy will also lose that money, and you’ll get penalized.
Term Life Insurance
Term life insurance offers coverage for limited years and doesn’t have any cash value. Unlike permanent life, you can’t tap into it while you’re alive unless you have a rider, such as a critical illness or chronic disease rider. Those riders let you take out more from your policy to help pay for care. Term life policies could be five years or as much as 30 years. You’ll likely pay more for term life depending on your age and length of the policy.
Final Expense Insurance
Final expenses insurance is a lower cost alternative to permanent and term life. As the name suggests, the coverage handles your final expenses, such as the cost of your funeral. The coverage is also known as burial insurance or funeral insurance. You shouldn’t view a final expenses policy as a way to provide for your loved ones in the long run. Instead, it’s merely meant to pay for your funeral and other final expenses.