Life insurance often gets overlooked by other concerns, such as saving for retirement and paying today’s bills. Only an estimated 57 percent of those who say they ought to have life insurance actually hold a policy.
We don’t want to think about our own death and often wait to purchase life insurance until loss hits close to home. When we see firsthand how much easier or more difficult things are for the survivors, we begin to value life insurance for the gift that it really is.
Life insurance is the final gift you give your loved ones.
How Much Life Insurance Do I Need?
Firstly, consider the costs of a funeral and burial. The average death costs loved ones around $15,000 for preparation, casket, services and burial. Both you and your immediate family members need policies that will fully cover these costs.
Next, you’ll need to add up your debt. Your estate assumes outstanding debt when you pass away. The executor of your estate must use your assets to pay off your debt. If you have more debts than assets, some of this debt may be transferred to your loved ones. Transferrable debt includes mortgage payments, home equity loans, credit card debt (if you hold a joint account), private student loans and car loans. So you need a policy big enough to cover all your debt.
Third, plan for your dependents and your spouse. Is your income essential to meeting your family’s financial burdens? Figure out how many years each of your dependents and your spouse will continue to need your financial support. Multiply that by your annual salary. Add an additional year’s salary per decade to cover inflation. If you plan on financing education, add an additional $100,000 per college degree you intend to cover. Your life insurance policy should be large enough to cover this number, plus your debt and burial expenses.
Finally, consider pets. A dog can cost up to $20,000 over the course of its life, and a cat can cost about $5,000. Estimate how much you spend per pet, per year—in terms of food and vet bills—and multiply that by the number of years you expect your pet to live. Add an extra year into the total, for the increased expense of senior-pet medical bills.
Now add all four of these numbers together, and you’ll get a fairly accurate base amount of life insurance you should carry.
Life Insurance Versus Savings and Investments
Creditors may not make claims against life insurance. It doesn’t count as part of your estate’s holdings, unlike any savings or investments you leave behind. Therefore, a large life insurance policy offers more protection to your loved ones than a large inheritance. In most cases, life insurance payouts are tax-free, whereas assets may be subject to an inheritance tax.
It’s important to keep your life insurance policy updated. If your beneficiaries die before you do, your life insurance payouts could go into your estate and be used to pay creditors.
Life Insurance Awareness
In 2004, September was designated Life Insurance Awareness Month. This September, revisit your life insurance policy and make sure your loved ones are adequately covered. Talk to a local Florida Farm Bureau Insurance agent about life insurance today.