How Much Life Insurance Do I Need?
Answering The Question: How Much Life Insurance Do I Need?
The number one question everyone asks when purchasing life insurance is “How Much Life Insurance Do I Need?” This is the number one question because it is the most important question. And it can be scary to think about what happens if you get this answer wrong.
For example, what happens if the life insurance you have won't provide enough income for your family? If this becomes reality, it would be the opposite of what you desire to provide for your beneficiaries.
Furthermore, thinking about life insurance is not a glamorous conversation because it causes us to think about our own mortality. And for many, this thought can be unsettling. However, this thought is far more unsettling if you and your family are not adequately protected.
Reasons For Purchasing Life Insurance
For starters, determining how much life insurance you may want begins by understanding the reasons for owning life insurance. Many people have a single reason that they purchase life insurance, while others have multiple reasons.
In January 2020, LIMRA(Life Insurance Marketing and Research Association) conducted a study to determine the top reasons that people own life insurance. Here are the top five reasons people are buying life insurance in 2020.
84% | Burial and final expenses
66% | To transfer wealth to the next generation
62% | Replacement of income
57% | To supplement retirement income
50% | Pay off mortgage
To purchase life insurance for only one reason is hard enough, but purchasing it to prepare for each one of these reasons can be even more challenging. When a comprehensive approach is taken, life insurance can potentially serve multiple purposes throughout one’s lifetime...including while you are alive.
The above reasons are the top five reasons in 2020 for why people purchased life insurance. Here are some other reasons that people buy life insurance that affects how much life insurance a person may want.
Providing for continuing education expenses for children
Making up for lost future social security payments of a deceased spouse
Paying off other debts such as student loans
Insuring the economic loss of both spouses
Delivering money to pay potential estate taxes so businesses and assets can stay intact for future generations
Providing funds for your business when cash flows are limited
Charitable giving strategies within estate plans
Benefitting from the tax advantages of life insurance
The above are the reasons that people purchase life insurance, but underneath the reasons that people purchase life insurance are additional factors and nuances that affect a person’s life insurance needs. Here’s a small list of additional factors that need to be considered.
Your age (the insured)
Age of the beneficiaries
Health of the insured
Health of the beneficiaries
Social security planning
Group life insurance owned through a company plan
Disability income replacement benefits
Using a Life Insurance Rule of Thumb
Often, in today’s internet age, it's tempting to consult the internet to determine how much life insurance you need. When consulting the internet, you will often find a “rule of thumb” to follow in order to find the "right" amount of life insurance. Like any rule of thumb, they are meant to be generic, covering a wide range of circumstances. Here are just a couple of rules of thumb that a quick internet search will provide.
Buy 5 to 10 times your income plus $100,000 per child for college expenses.
Or you can use the DIME acronym, which stands for:
Debt and final expenses
While using a rule of thumb may get your life insurance needs into the right ballpark, it fails to consider that no two situations are alike. A comprehensive approach, on the other hand, can provide you with an individualized outcome. A strategy that comprehensively examines all of your needs(and wants), both now and future, is more likely to hit YOUR goal rather than some generalized goal.
And just like any other long-term decision or set of decisions in life, life changes and evolves. Therefore, revisiting your decisions over time is also a key element of the comprehensive approach.
Benefits of Creating a Detailed Life Insurance Strategy
Using a rule of thumb can be better than ignoring the need and not owning any life insurance. However, taking a more thoughtful and directed approach is likely to provide multiple benefits to both you and your family.
Below are a few of the potential benefits of developing a detailed life insurance solution unique to your situation:
Flexibility to change and adjust your life insurance based on future life changes.
Learning how to use life insurance for multiple purposes throughout your life.
Incorporating your life insurance decisions with all of your other financial decisions can allow life to be lived without worry and fear, regardless of when you die.
Integrating your life insurance decisions with your retirement decisions can potentially help you retire with less uncertainty.
Having peace of mind that you are providing for your family, should you die when your family still depends on you.
As a result of reading this article, hopefully, you see that owning the right amount of life insurance isn’t as simple as using a rule of thumb.
When you contact How Much Life, you get the experience of a Life Insurance Professional(s) that has helped thousands of individuals, families, and businesses over decades. Whether you contact How Much Life or some other life insurance professional, we suggest you think twice about merely following a general rule of thumb when it comes to providing for your family in the event of the unthinkable. Let us help you develop a life insurance solution that is right for you.