The overall goal of a financial plan is to use your money in a way that supports your values and your unique vision of a happy life. Saving money gives you the freedom to decide how you want to spend your time and money. In the short-term, an emergency fund helps cover unexpected expenses or income gaps. At the other end of the spectrum, life insurance provides peace of mind to your family in the event the unspeakable happens.
How do you know if buying life insurance is the right decision for you?
Obviously everyone’s financial situation is a little different, but in general, you should have life insurance once someone else is financially dependent on you. For most people, this is when they’re starting or thinking about starting a family. Even if you’re married with no kids, you may want to buy a life insurance policy if you have a mortgage or significant student loans. I’m talking about significant loans from medical, dental, or law school. Same goes for if you’re single and a parent co-signed on a mortgage or student loan. If your parents would be burdened by paying off that debt, it might be a good idea to get a small life insurance policy.
How much coverage do you need?
There are roughly 125 million households in the United States and approximately 35 million don’t have any life insurance. Another 58 million households feel like they don’t have enough life insurance. It’s also important to note that stay at home parents should also consider a life insurance policy since the surviving parent would have to pay for child care.
One quick rule of thumb is to purchase a life insurance policy to cover 7 to 10 times your annual salary. But that might not be enough. More specifically, your life insurance policy should cover the following:
Total debt + financial support you want to provide + burial costs – current savings and assets – other life insurance policies
Total debt includes your mortgage, student loans, and any outstanding consumer debt.
Financial support runs the gamut of the costs of child care, schooling for your children (which might also include college), and regular living expenses. This is particularly important if you and your spouse were depending on two incomes to cover these expenses. And if the surviving spouse doesn’t have insurance coverage through an employer, the policy should also cover the premiums for medical, dental, auto, home, disability, life, and other insurance needs. Financial support may also include a portion of retirement.
Current savings includes anything in your savings, checking, retirement, and investment accounts. It also includes assets like your home or automobile.
What type of life insurance should you buy?
In general, a 20 to 30-year term life insurance policy is all that most people need. As long as you pay your premiums, a term life policy locks in your coverage for those 20 to 30 years. Plus, term life is more affordable than whole or permanent life insurance. A life insurance salesman will try to tell you life insurance (of the whole or permanent variety) is a great investment, but they make huge commissions on selling you that policy.
What if your employee benefits include a group life insurance policy?
Unfortunately, life insurance purchased through your job doesn’t come with you. Plus, that group policy might not provide enough coverage. So you’re better off buying an individual policy and think of your group policy through work as an added layer of financial protection.
Finally, it’s important to review your life insurance policy as your needs change. For example, you may need more coverage if your family becomes larger than you initially thought. Or maybe you need less coverage if you paid off your mortgage early or have plenty saved for retirement.
And remember to update your beneficiaries as your family grows!
