How Much Life Insurance Do You Need?
Back in November, I had something strange happen. I’ve had life insurance for a long while now, but for some reason I had more money taken out of my account than expected. I called my insurance agent and left a message for him to get back to me. Instead, someone who reports to him stopped by the house a few days later and we sat down to look at my policy.
It turns out I actually had 3 policies with them! That shocked me because I always thought I only had 2. It seems that when my account was given to two other people after my first agent left, they set me up with another policy that I had no recollection about.
We did some paperwork to get rid of one of the policies. It wasn’t the oldest or newest but it was for the least amount of coverage. While we were going through the process, my agent asked me how much coverage I wanted and why, and what I was hoping to get out of them. Based on this conversation I’m going to talk about the concept of how much life insurance you need or think you might need.
First, you need to think about what you’re looking to cover. The majority of life insurance policies are for less than $15,000, and that’s to cover any funeral expenses so that the family doesn’t have to worry about how to come up with the money for it since funerals can be expensive.
If that’s all you want then you’re just fine. But what if you want to make sure your family has some kind of financial protection if you’re gone? You might want to help pay off the house, or have enough money to put the kids through college, or even put enough away to help pay for your retirement down the line.
Second, you have to come up with an appropriate amount for all of these things based on what you’re hoping to cover. Do you want your family to have the equivalent of a year’s worth of your income if you pass away? What about extras if your demise is caused by something like a plane crash? Are you looking to help your money grow like an investment? Are you thinking ahead that you might want to borrow against the policy?
This one is important because it can be seen as the “dream goal” or something practical. If you think you might want or need to borrow against it, you’ll learn that it’s tax free, but could come with the caveat that you need to replace whatever you borrow against.
You also might want to purchase a policy that allows you to change your needs as time goes by. For instance, if you buy a policy when you have young children you might want one with a higher death benefit, but once they’ve grown up and moved out of the house you might want to reduce it. At the same time, maybe you bought a policy that has grown to the point where it’s covering the monthly payments on its own, so you never have to think about it.
All of these are considerations you should think of before you move to step #3, which is contacting an insurance agent and setting up a place and time to meet. You might think this should be step #4, believing that the third step should be considering how much money you have to spend. In this regard I’m going to tell you that worrying about cost is pretty much a waste of time. Why?
Like most big purchases, you shouldn’t even consider buying life insurance if you don’t have any disposable income you can part with without hurting yourself. Insurance is one of those things where it’s for protection, not anything tangible. Most people don’t get to be around to “enjoy” the benefits of their life insurance policies, unlike buying a car.
Yet figuring out how to pay for it is just like a car. You have to make monthly payments, and the only difference between life insurance and a car or house payment is that some policies you’ll be paying on for the rest of your life; sounds ominous doesn’t it?
The reason you talk to an agent first is that, for the most part, it’s hard to come up with a payment amount on your own without talking to someone. True, there are some websites that have widgets on them that can help you estimate what your payments might be life. What they don’t tell you is how much extra fees you’re going to get charged will be; sometimes your final amount isn’t anywhere close to what you thought it was going to be.
How much life insurance am I paying for? I’m not going to give the exact amount because… well… it’s none of your business. 🙂 However, I will tell you that if I die before age 65, my policy will pay off the house, no matter how much is owed on it at the time; that’s covered under one of the policies. Strangely enough, if I make it to age 70 it will expire; that means I’ll have paid for it all these years and get nothing back from it. That part stinks, but it’s nice to know that I’ve taken care of my wife up to that point.
The other policy is growing in value, which I can borrow against, but it has a guarantee that no matter how much is in the policy, it will cover the amount of a death benefit up to $10,000. If I don’t touch it and continue paying into it, the policy will be worth more than $50,000 if I reach age 70, as long as I never touch it, and it will continue to grow if I want it to. The best part about it is that if my wife predeceases me I’ve named other beneficiaries to the fund, since I have no children.
The answer to how much life insurance one needs depends on what you want to use it for. Regardless of that, the reality is that you need life insurance, and you should purchase it at a young age, before you get ill or injured and have to pay more for coverage than you do before any of those things happen to you.