Purchasing life insurance is a wise action. However, many Americans do not buy enough coverage to suit their needs. Every little bit helps, but an insufficient amount can leave survivors struggling to make ends meet. Research shows that more than 30 percent of adults do not own life insurance policies. Unfortunately, the majority of those who do have coverage do not have enough. In America, the collective value of life insurance policies tops $10 trillion. Although this number may sound astonishing, it represents less than 75 percent of American citizens’ combined income. Uninsured families know they are taking a risk, but the majority of families with insufficient coverage do not realize their mistake until it is too late. Those who do not have life insurance should obtain it immediately, and anyone who has a policy should examine it carefully.
Picking the Right Amount
It is difficult for people to determine how much life insurance they need. There are a few different ways to calculate the proper amount. Although some experts recommend tripling income, others claim it is best to multiply annual income by eight. However, set multiplication figures may not be the best idea for every person. Families and individuals have varying needs, and everybody’s situation is different. For example, two families with the same income may have very different expenses. One family may have very little debt and healthy children. The other family may have extensive debt and a child with an expensive lifelong illness. The second family would probably need to multiply more than double their annual income to ensure adequate coverage.
One easy way to determine how much coverage to purchase is to answer the following questions:
– How much money will survivors need to continue paying the mortgage?
– Will the surviving partner need to pay childcare expenses? If so, approximately how much each year?
– How will inflation affect survivors’ finances in the future?
– Approximately how much money will each child need for college tuition?
– Would the surviving partner have enough money to quit work to take care of the children?
– Will a surviving partner have enough money to make adequate contributions to a retirement account?
It is important for couples with children to talk about childcare and work. Some people may prefer to quit work to take care of the kids. However, others may feel they need to keep a job for their own mental health benefit. Make sure adequate provisions are made for either option. After answering all of these questions, it is easier to choose an accurate policy amount. In addition to buying enough coverage, it is important to buy the right type of life insurance.
Understanding Types of Policies
The two most common types of life insurance are term life and cash value. Term life provides coverage for a certain amount of time. The term may be one year, five years or even 30 years. Since they are designed only for protection, term life policies are less expensive. It is a good option for families who want to have a higher amount of protection for less money until their kids reach a certain age. Cash value coverage lasts for the insured’s entire life. This type of coverage serves as an insurance policy and a savings plan. Insurance companies invest some of the premium, so the policy accumulates cash value without tax consequences. After several years, it is possible to borrow money from a cash value policy. Loans are not considered income, so there are usually no tax penalties. However, withdrawals are deducted from the death benefit. To make sure enough life insurance is purchased, discuss personal circumstances with an agent.