Anything is better than nothing – so buy something you can afford
Buying life insurance isn’t quite as complicated as some people think. While it’s true that wealthy people often have multiple life insurance policies covering all their different assets, for most people just having a single policy will be sufficient.
When considering how much life insurance you need, consider the purpose of life insurance: to provide money to your loved ones if you prematurely pass away. For most people, that life insurance money is mainly used as an income replacement if your income suddenly goes away.
Income replacement is a great starting point for estimating how much life insurance your family would need. If your loved ones solely depend on your income, then you may need to replace your income for a longer period of time, since your spouse or guardians of your children will likely need more time to look for a job that can replace your income.
If you can afford a larger amount of life insurance, then you can start separating what your income goes towards and account for those things in your life insurance death benefit amount.
For example, you can list out all your debts and savings goals and add them up for a grand total. Your list might look something like this:
- Mortgage = $300,000
- Car loans = $20,000
- Student loans = $30,000
- Credit card debt = $10,000
- Annual savings goal = $5,000 x 5 years = $25,000
- College education = $80,000
- Cost of living expenses = $20,000 x 5 years = $100,000
- Funeral expenses = $20,000
In this scenario, the total amount of life insurance you’d need to cover all of those expenses and savings goals would be $585,000. You might increase the number to $600,000 to give your loved ones a little extra leeway with the money.
If you get a life insurance quote for $600,000 and the premium is too high, then you will have to decide which of those items can be taken off the list. For example, you could only include half of your mortgage amount and only a couple years of savings and living expenses, which would reduce the total amount by $200,000.
Most people’s life insurance needs aren’t fully covered by their policy amount, because they either underestimate the amount of coverage they need or they can’t afford that much coverage.
The most important thing to remember is to buy an amount that you can afford, because not having enough life insurance is much better for your loved ones than not having any life insurance at all. Pick and amount that you can afford and your loved ones will greatly appreciate that policy if they do need to use it.
Any type of life insurance that you can buy is better than not having anything at all. It’s always worthwhile to buy some type of coverage for your loved ones, even if it doesn’t fully cover all of your assets.