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Investing in a life insurance policy starts with determining the appropriate amount of coverage. Every family has different financial needs, so coverage requirements for one family will not be an appropriate amount for another family. Calculating the appropriate amount of coverage will make it easier to find a term life policy that meets individual needs and goals.
How Much Does Life Insurance Cost
A key aspect of calculating the appropriate amount of term life insurance starts with looking at the family situation. A family that has four young children will have different needs than a family with two teen children or a retired couple that has adult children that have already moved out and completed college.
The situation within the family unit is part of determining the appropriate amount of insurance. Even a single individual will want to have some insurance to ease potential burdens that might fall to adult children, parents or next of kin upon an unexpected death.
As a general rule, the family with several young children would require a higher insurance policy for both parents than a family with teens, a single individual or a retired couple who have grown children. The reason is that if one of the parents passes away, the financial burden left on the remaining parent might be too high to handle within the first year or two alone.
Once an amount of insurance is determined, you must decide how long you need the coverage to be in effect. If you do have young children you may want to look into a 20 year term life insurance policy, which will provide coverage until they become adults. If you have teenage children than a 10 year policy may suffice. It is important to discuss with an agent what your reason for insurance is and they will work with you to help you make this decision.
At Mozdex we work with our clients and look at their unique family situation before looking for any policy amount. Look at the age of children, the likely cost of raising the children and the lost income if a death occurs. Even a stay-at-home mother will want to calculate the cost of daycare for young children to determine a potential expense that might not occur while both parents are alive.
The cost of a funeral, burial and other death related expenses should be considered in the insurance policy regardless of the situation. A family situation does not alter the average prices of funerals. In most cases, a funeral will cost between $8,000 and $20,000. The exact expense will vary based on factors like whether an individual is cremated or buried, the cost of a casket, the memorial service and the particular location.
Adding in around $10,000 to $15,000 to consider the funeral expense and potential burden on the family or relatives involved in the process will ease the situation. All policies should have this added cost considered in the policy.
Personal debts are debatable depending on the nature of the debt. Some debts will fall to family members while others are not. When calculating the coverage for a term life insurance policy, adding in any remaining debts can help ease any potential burdens on a family. This is particularly true if the debt has a co-signer or is taken out by two individuals. People will purchase life insurance for parents if their parents have a high level of debt. This is to insure they do not assume the debt in the event of their parents' early demise.
Common debts to consider covering include student loans, credit cards, car loans and a mortgage. The debts with a co-signer or two individuals on the account are best added to the insurance coverage unless other arrangements are made beforehand to avoid a heavy financial burden on the remaining individual. Determine how much mortgage insurance you need with our mortgage calculator if you are planning to use the benefits of a life policy for the purpose of repaying your mortgage.
An individual who has a family with children should consider putting the mortgage and car loans in the policy coverage. This will help a spouse avoid the potential loss of a home due to foreclosure or similar problems.
Education costs are a matter of personal preference. Parents can choose to add college education expenses to the coverage or not, depending on personal preferences, childrens age and the potential for complications.
Those who opt to cover college expenses should determine whether to cover full costs, partial tuition or beyond the tuition. It also must consider whether children are likely to attend public or private schools. Since tuition costs are rising each year, parents should consider a 5 percent per year increase from current rates.
Calculating the cost based on childrens age, the likely number of years until college and the 5 percent per year increase in cost, parents can determine a reasonable addition to the coverage. Even divorced couples will sometimes be forced by the courts to add this into their settle agreement. In certain scenarios life insurance for divorce settlements are used to protect the surviving ex-spouse from being the only responsible parent.
Lost income is the last factor to consider when selecting coverage amounts. Lost income should consider the reduced expenses already added to the coverage, such as paid off mortgages, before determining an appropriate amount. In most cases, calculating about 50 to 60 percent of pre-tax income per year until the age of retirement will help. For example, someone who makes $50,000 a year pre-tax will want to calculate $25,000 per year until a spouse reaches retirement. If that means ten years of income, then coverage should have $250,000 for income replacement.
The final determination of how much term life insurance is adding the lost income, education expenses, debts and funeral costs together. Some individuals might only need coverage for debts and funeral costs while others will add other additional expenses. The key is identifying the personal situation and calculating coverage based on adding all of the factors together.