According to Insider, half of Americans who do have life insurance are underinsured, meaning their death benefit would not cover expenses like mortgage, college loans, or basic essentials like food, debts, and clothing for dependents in the event of their death.
It is important to ensure that you have the appropriate financial resources in place to support your loved ones who are dependent on your income in case of your death. Life insurance is a type of insurance that pays out a sum of money either on the death of the insured person or after a set period. The insurance is an agreement that the insurance company agrees to pay a specified dollar amount to beneficiaries after the death of the policyholder. This amount is called a death benefit.
The different types of life insurance
There are two different types of life insurance Term and Whole.
- Term- Term life insurance is insurance that covers your life for a set term. A term is a specific limited amount of time such as 15 or 25 years, this is dependent on your age and for how long you would like to be covered with life insurance for. Once the policy has exhausted the years it was purchased for the holder is usually able to extend coverage, in some cases medical exams are necessary. Term life insurance is usually less expensive than whole life insurance, however this type of insurance does not build up an asset you can borrow from or access for illness or disability. This type of life insurance is usually more appealing to young families who may not have the ability to purchase whole life insurance due to the higher costs associated with it.
- Whole- Whole life insurance policies are a permanent insurance that covers the policy holder for life—as long as the premiums are paid. This type of life insurance accumulates value over the years that it is paid into, and it has a guaranteed dollar value. There are some whole life insurance policies that will provide the holder with benefits beyond life insurance—known as living benefits. This type of insurance also allows you to borrow out of your policy if you need to as well as access payments if you are faced with a terminal illness or disability.
How much life insurance do I need?
Determining the amount of life insurance, you will need is challenging because you will want to forecast the amount of money your dependents will need to survive without your income and assuming your debt. A good starting point would be to add up your long-term financial obligations and take out your assets. A substantial part of determining your life insurance policy is understanding the amount of money your loved ones will need to live comfortably. If making the premium payments is financially hard for you then the policy is probably too much for your situation.
A few things to consider:
- Multiply your income by 10
- Buy 10 times your income, plus $100,000 per child for college expenses
- Use the DIME formula
D. Debt and final expenses: Add up your debts, other than your mortgage, plus an estimate of your funeral expenses.
I. Income: Determine for how many years your family would need support, and multiply your annual income by that number.
M. Mortgage: Calculate the amount you need to pay off your mortgage.
E. Education: Estimate the cost of sending your kids to school and college.
Professionals can give you the best estimate
Do you have questions or want help calculating how much life insurance you should apply for? Contact Us.