30 Sep How Much Life Insurance Do You Need?
Life Insurance 411: The Cost, Importance and What Type of Policy is Best for Your Life Stage
Life insurance protects heirs from financial hardship after the loss of a loved one. While most people can benefit from life insurance, only 57% of the adult population owns a policy. Through life insurance, you can provide immediate financial benefits that bypass the estate settlement process.
Many companies offer life insurance as part of the benefits package, making it easy to enroll. However, corporate policies do not follow you if you change employment. An independent policy gives you more control over the long-term costs of insurance.
What Form of Life Insurance Should You Purchase?
Life insurance comes in two primary forms: Permanent and Term
Permanent insurance combines life insurance with a savings element. Each monthly payment contributes a portion of the payment towards the insurance and a portion towards investments. Permanent policies build cash value, which you can use to pay up the policy, borrow against, or cancel and receive a cash payment.
You can purchase permanent insurance through a whole, universal, or variable life policy.
The key disadvantages of permanent life insurance are the cost, the high fees, and the inability to receive both the cash value and the life insurance.
- Permanent policies generally cost about 20 times more than term policies.
- The complicated contracts charge high fees, lowering the overall rate of return you can expect.
- While you can withdraw the accumulated cash value the policy tax free, if you do, you could lose the insurance if the policy was using some or all of the accumulated cash value to pay for premiums.
- At your death you heirs will receive the insurance face value payout but forfeit the accumulated cash value.
Term insurance is pure insurance with no savings or cash value component tied to the insurance. The policy has lower costs and is simple to understand. Companies consider your age, sex, and health for a set number of years when quoting rates.
The Cost of Insurance
A healthy person can purchase $250,000 worth of life insurance in 2019 at the following annual rates:
How Much Life Insurance Should You Purchase?
A general estimate is between 10 and 12 times the annual salary of the insured. For example, if you earn $50,000, you should buy between $500,000 and $600,000 worth of insurance. A 40-year-old female can purchase $500,000 worth of term insurance on a 20-year policy for $294 per year, and a male will pay around $347 per year.
However, many factors can alter the amount of insurance you need. Here are a few things you should consider when determining how much life insurance you may need.
Financial need: You can estimate your insurance needs by adding current income and assets. Then subtract your financial obligations, including debts and expenses and multiply it by the number of years your loved ones need support.
Any anticipated future costs not considered above: In addition to current debts and expenses, you might want to provide for other expenses such as a child’s college education. Other circumstances might include supporting an adult child with a disability, or a spouse’s need for additional education to replace your income.
Your age: As you get older you might have fewer people depending on your income, lower debt levels and more assets, reducing the need for life insurance. You may even reach a point when you no longer need coverage at all.
You are always better off separating insurance and investments. Build wealth through products designed to grow your portfolio and buy term insurance to cover your life insurance needs.
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