This article was last updated on July 16
My neighbor and I were talking this weekend and he asked me this question, “Andy, do you think I have enough life insurance coverage from my employer, given Coronavirus/COVID risks if I have to start going back to work next month? Don’t want my kids to be homeless if something happens to Janet or I (he is married with 2 kids)? Should I get supplementary coverage?
We talked a bit further and I found out that Dan had standard life insurance coverage via his employer, which is about 1x his salary, or approximately $120,000. While this may seem a lot, it is no where near enough to cover expenses for any considerable amount of time given he has a family to support and bills to pay. So I absolutely recommended he get more supplementary coverage and in today’s market there are some good deals to be had given that more and more people are bumping up their life insurance coverage. And if you lost your job, getting your own coverage is even more critical.
Life insurance should always be an important component of your financial planning. But given the current pandemic and potential risks/impact it could have to your family, it could actually be the most important element of your family’s financial security should tragedy befall. Just relying on your employers coverage likely means like most American’s you won’t have enough coverage. So take some time out and at least get a free online quote to see what the costs of life insurance are and you may find a small monthly premium gives you a lot more in terms of peace of mind and coverage for your family.
What kind of insurance is best?
Life insurance policies come in two basic variants – whole life and term life insurance. Whole life insurance offers death benefits plus cash value, on account of which premiums are higher. This is very similar to universal life insurance so I am considering these in the same bucket of life insurance. On the other hand term insurance is for a limited term as the name implies, and is more affordable because it only concentrates on death benefits and has no cash value when the policy expires. When you are young with a lifetime of loans, expenses and mortgage payments to be paid, your kids education and upbringing to look after, you probably should consider the more affordable term life insurance. Since a term life policy can help you focus on just the death benefits, it makes sense to understand it better, and work out the best coverage amount possible.
What kind of expenses and financial needs should a term life policy cover?
On the event of your death, the death benefit of your term life insurance policy should be able to have your family pay off your funeral expenses and invest the rest so that they can lead a comfortable life much like the one you provide for them now.
- Funeral expenses can work out to be as high as $5,000-$20,000 currently, so that’s why you will need to factor that in to your life insurance planning
- Next, your death benefit should replace your current income, so that your family can carry on with life for at least three to five years without having to make major lifestyle changes. Remember to take into account inflation and rising costs.
- Thirdly, factor in your debts – unpaid mortgage, credit cards and loans could eat into the death benefit amount, leaving your family with very little to take care of other expenses.
- If you were to die, your family would surely have additional expenses to replace the services you used to take care of yourself. If you handle the accounts on your own, or take care of the plumbing yourself, your family may need to hire the services of an accountant, or a plumber. If your spouse is currently a stay at home parent, your family may need the services of a nanny in case he or she decides to start working to supplement their income. It’s the little details that will help you work out your family’s expense requirements better.
- If your kids are young, a part of the death benefit will have to be invested to pay for their college education.
- Consider any hidden income that you may be currently earning, but which would be lost at death. Examples are your perks, your employer’s contributions to your 401(k) plan, health insurance and your retirement fund contributions. Too many people overlook factoring this into their calculations while in actuality they could easily add up to $10,000-$12,000 per year.
How to calculate the coverage amount – How much insurance do I need?
There are conflicting views on how to arrive at the perfect coverage amount for your life. Here’s an alarming statistic. The average American has about $120,000 in life insurance coverage. That seems like a lot, but it is only about two times the average annual household income in the U.S. So it’s going to tide your family over for a couple of years, but remember that you’re going to be dead a lot longer than that! So how do you calculate the ideal coverage amount?
The rule of thumb in the insurance industry says that your coverage should be 7 to 15 times your annual income. However, like we discussed earlier, annual income is not the only factor that should be considered when determining your needs. How much term life insurance you need is a highly individual figure. But if you know exactly what your death benefits should help pay for, then you definitely won’t make the mistake of under-insuring yourself. So the long and short of the ‘how much is enough’ dilemma is that the death benefit you provide your family should be more than your net worth. Use the help of online Life Insurance Tools and Calculators help you arrive at an accurate coverage for your personal situation.
How often should your policy be reviewed?
If you already own a term insurance policy, either through your employer or via an older policy, that’s not enough reason to think that you have enough death benefit. If you have failed to consider the expenses and the loss of income sources that may follow your death, you will need to review your policy. It literally takes minutes to get life insurance quotes online and see where you stand.
Even if you have taken everything into consideration, experts recommend that you review your policy whenever there is a life changing event such as the arrival of a baby, taking in an additional family member, changing jobs, looking after ailing parents, or the loss of a spouse. These events will increase your expenditure.
In times of recession the value your investments drastically dip, while your life insurance benefits remain the same. If you were to die in the next two years, your investments would have accrued a lower income than expected due to the present economic crunch. Have you factored this into your life insurance plan? You may need to review your term policy especially during economic downturns.
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