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We know it’s kind of morbid, but take a moment to picture what your family’s life might be like financially if you died today. Would they be able to pay for your funeral? Would they be able to cover the household bills—now and in the future? The answers to these questions should help you figure out whether buying a life insurance policy offers a necessary protection or an unnecessary expense.
Who needs it?
Single people, two-income couples with no dependents, and your minor children probably don’t need it. Putting enough money to cover funeral expenses into a savings account might be all that’s necessary. But if you have a family that depends on your paycheck, not having insurance may put your loved ones at financial risk. As the sole breadwinner for your family or as half of a two-income family with minor children, you need to make sure your income is protected for those who rely on it.
Not only will your family have to cover your funeral expenses, which can run anywhere from $8,000 to upwards of $20,000, they’ll need to replace a good percentage of your income to cover everyday living expenses like rent or mortgage payments, food, childcare, and so forth. And, if you were counting on investing part of your income to eventually pay for your kids’ college education or other major expenses, you’ll need to replace that, too.
How much do I need?
Many financial experts suggest coverage that equals eight to 12 times your current salary, although that rule of thumb varies depending upon the source. Of course, everyone’s needs are different, and you may want to do a more specific calculation based on your situation. The easiest way is to use an online calculator or worksheet that helps you figure out how much of your income your family would need to replace and for how long, with the resulting figure being the policy amount you should consider. If you go this route, try to use calculators from independent sources, rather than those found on life insurance company websites. You’ll typically get a more conservative, less biased projection.
What kind of insurance should I buy?
Term. Whole. Universal. Variable. With so many kinds of insurance available, it’s not easy to figure out which type best suits your needs. Term life is the simplest and least expensive of all of these, because you’re buying a specific amount of coverage for a specific price and for a specified period of time—usually 10, 15, or 20 years. If you die during that time, the person or persons you’ve named as beneficiaries receive the value of the policy.
The other types of life insurance are a bit more complex than term, because they all entail more than just the life insurance component. Typically, some portion of the amount you’re paying in premiums is going into a savings or investment vehicle, and thus the premiums are usually higher than those for term.
Whether you want or need the savings or investment portion is a personal decision—but know that the question of whether investing should be tied to your life insurance at all is something hotly debated among financial experts. Many say no, arguing that the higher cost of the insurance itself isn’t worth it, and that you could get a better return on your investment using other types of savings vehicles.
In the end, if your family relies on your income, you owe it to them to figure out how much coverage you need and to get at least a term policy in place as soon as possible.