Life insurance is designed to protect and provide for your beneficiaries in the event of your death.
Under the terms of a life insurance policy, the insurer promises to pay a certain sum to a person you choose (your beneficiary) upon your death, in exchange for your premium payments.
Proper life insurance coverage should provide you with peace of mind, since you know that those you care about will be financially protected after you die.
The Many Uses of Life Insurance
One of the most common reasons for buying life insurance is to replace the loss of income that would occur in the event of your death.
Support Your Family
When you die and with the loss of your income, your family may be left with limited resources. A life insurance policy will make cash available to your family almost immediately upon your death.
Pay Debts & Expenses
Life insurance is also commonly used to pay any debts that you may leave behind.
It can be used to pay off mortgages, car loans, and credit card debts, leaving other remaining assets intact for your family.
Life insurance proceeds can also be used to pay for final expenses and estate taxes.
Create an Inheritance
A life insurance policy can help create an estate for your heirs. It can also help further their education by paying for their tuition.
How Much Life Insurance Do You Need?
Your life insurance needs depend on a number of factors, this includes but is not limited to:
- If you have a family
- Your financial obligations
- Your career stage
- Your goals
For example, when you’re young, you may not have a great need for life insurance. However, as you take on more responsibilities and your family grows, the need increases.
It’s also important to note that life insurance is most affordable when you are younger and healthier.
Many tools exist to help you determine how much coverage you should have. Yet, your best resource would be a financial professional.
Insurance Coverage Quiz
At the most basic level, the amount of life insurance coverage that you need corresponds directly to your answers to these questions:
- What immediate financial expenses (e.g., debt repayment, funeral expenses) would your family face upon your death?
- How much of your salary is devoted to current expenses and future needs?
- How long would your dependents need support if you were to die tomorrow?
- How much money would you want to leave for special situations upon your death, such as funding your children’s education, gifts to charities, or an inheritance for your children?
Since your needs will change over time, you’ll need to continually re-evaluate your need for coverage.
How Much Life Insurance Can You Afford?
How do you balance the cost of insurance coverage with the amount of coverage that your family needs?
Many factors determine the cost of life insurance coverage, including:
- The type of policy that you choose
- The amount of coverage that you want
- Your age
- Your health
- Which also includes factors such as smoking
The amount of coverage that you can afford is tied to your current and expected future financial situation as well.
A financial professional or insurance agent can be invaluable in helping you select the right insurance plan.
In our next article, we’ll cover the ins and outs of a life insurance policy.