For most people, getting life insurance is a good idea since it will provide them and their family with financial coverage. That being said, the question of how much life insurance is actually needed may be a tough one to answer. Obviously, it depends on financial and personal circumstances, but a good rule of thumb is to aim for a coverage equals to 7 to 10 times your annual income. Let’s go a bit further and assess the factors you need to take into consideration while purchasing a life insurance.
What Kind of Payout Should You Be Looking For?
If you’re going for term insurance (which we would recommend), the typical payout you can expect ranges from $20,000 to $10 million. Individuals in their 30s and 40s typically purchase policies that offer a payout ranging from $250,000 to $1 million. These are averages and don’t necessarily reflect what you may need considering your particular situation. A good way to evaluate the amount of coverage that you should be going for is to calculate your financial obligations (comprised of your monthly expenses and your debt), to deduct from that your liquid assets (meaning your after-tax income and your savings). The result is called your coverage gap and represents the amount of payout you should be looking for.
Typical Expenses You May Need to Cover
Determining an adequate amount of life insurance coverage boils down to a “needs-based analysis” that takes into account everything you may need to pay for in a distant or not-so-distant future. These expenses can be classified in broad categories as follows:
This section encompasses recurring and predictable expenses you can easily prepare for: your rent / mortgage, groceries, car payments, etc. The cost of raising children is also something you should definitely take into account, especially if you’re considering paying for their education.
Debts and Other Liabilities
Dying with outstanding debts will force your survivors to take them on if they want to access their inheritance, and /or your spouse to reimburse alone the loans they co-signed. These are only a few of the most common scenarios you need to keep in mind while shopping for a life insurance policy.
While raising a child is certainly one of the most important financial commitments one could make, caring for an aging parent is an often-overlooked semi-obligation that can rapidly take a toll on one’s finances. If you have one or several dependents, you need to consider increasing your policy payout by at least a couple of $100,000. If you don’t, life may hit you hard, especially if your parents start to rely more and more on you while you’re still financially supporting your adult children (which is more and more common).
No one wants to think about it — especially when they’re in their prime — but dying is an expensive business whose cost falls on other people’s shoulders. The average amount for funeral expenses ranges anywhere from $7,000 to $10,000, which includes burial costs, the funeral home’s service, the casket, etc. Prudent policyholders try to incorporate these expenses into their coverage in order to alleviate the burden on their loved ones during these challenging times.
Health and Age
While financial obligations are important items to consider before purchasing a life insurance policy, there are other elements to take into account, and the most obvious ones are your age and your health status. They will not only determine the amount of the payout you should shoot for, but also how long you’re going to pay for it. Technically, you need less coverage the older you get because more often than not, you also have less debt and fewer people who depend on you — if any.
In short, if you get life insurance when you’re in your twenties/thirties and healthy, you’ll probably get a more affordable premium for a potentially larger amount of coverage. That should be reason enough to think about getting life insurance when you’re young enough that you think you won’t need one, and https://emma.ca/ is a good place to start your research.