How much life insurance do I really need? You should have a coverage of 10-15 times the annual expenses of your dependents or 8-12 times your annual income. However, some companies suggest coverage of 6-8 times the annual salary of the policyholder.
Life insurance, a brief overview
If you are a financial supporter of a child, a life partner, old parents, or any other family member like a brother, sister, etc. who are relying upon you, what do you think about their survival if you face a sudden demise?
To make the future of your loved ones secure, even in your absence is the aim of a life insurance policy. Life insurance is a contract between an insurance company and a person who intends to buy a policy, that is represented by a policy.
The insured has to pay regular monthly or annual premiums and the insurer or insurance company offers the guaranteed face value to the nominated beneficiary when the insured dies.
To better know that how does life insurance work, one has to understand the two main types of life insurance policy.
Term life insurance vs permanent life insurance
The first step in buying a life insurance policy is to choose which type of policy you want to have. Either you want a lifetime coverage with the cash-value plan as happens in the permanent life insurance or you are eager to buy a policy that covers a specific term.
1. Choosing the best
Choices that you make today define your tomorrow. Choosing the best-fit insurance policy according to the needs and budget of a policyholder is the very first and future defining step.
You have a low budget and you go for permanent insurance, it may cost you. You may not be able to pay the heavy premiums associated with permanent life insurance.
Premiums for term insurance are relatively low and can be afforded by a person with an average monthly income.
2. Investment account
In all forms of permanent insurance policy there is a facility of cash-value. Premiums that are paid by the policyholder, are split into two portions. One portion covers the cost of insurance while the other goes into the investment account, known as the cash-value account.
Term insurance doesn’t offer a cash value plan and the only thing a policyholder is provided with is the guaranteed death benefit.
3. Conversion facility
The policyholder should know while choosing a policy that there is a property of conversion associated with term insurance.
If later in life, he feels that he should change the policy from term to whole life, he can convert it. However, permanent insurance doesn’t have this conversion option.
4. Tax implication
There should be clarity in the mind of a policyholder regarding the query that is life insurance taxable or tax-free? Term life insurance is tax-free, while permanent insurance is tax implacable in some specific situation.
5. Number of beneficiaries
Beneficiary is the person who is nominated by the policyholder to receive the payout when the policyholder dies.
It’s not necessary to nominate just one beneficiary, the policyholder can nominate more than one and also the contingent beneficiary.
6. Receiving death benefit
Insurance companies are generally unaware of the death of the policyholder and to receive the payout, the beneficiary has to contact the insurance company.
He can make a claim for death benefit by submitting the required documents.
Rates of term insurance and permanent insurance
Premium rates for both the policies are not the same. Term insurance rates are comparatively low than the permanent ones. However, rates are variable according to age, gender, health condition, and the insurance company. A general overview of rates is given below.
|Age in year||Policy amount||Rates for males||Rates for female|
|30||$ 250,000||$ 2,144||$ 1,905|
|$ 500,000||$ 4,234||$ 3,754|
|$ 1 million||$ 8,379||$ 7,418|
|40||$ 250,000||$ 3,120||$ 2,765|
|$ 500,000||$ 6,327||$ 5,477|
|$ 1 million||$ 12,564||$ 10,866|
For 30-year term life insurance policy
|Age||Policy amount||Rates for males||Rates for female|
|30||$ 250,000||$ 224||$ 192|
|$ 500,000||$ 367||$ 306|
|$ 1 million||$ 646||$ 525|
|40||$ 250,000||$ 341||$ 281|
|$ 500,000||$ 604||$ 484|
|$ 1 million||$ 1,114||$ 895|
Permanent life insurance is relatively costly than term insurance and it covers the whole life of the policyholder. Term insurance offers low premiums and doesn’t have an investment plan. Policies are cheaper for women as compared to men.
How much life insurance do I need?
Life is so uncertain. The biggest fear of a person who is a financial supporter of a family is to see them suffering when he dies. So, a life insurance policy is a guardian angel for his dependents in case of his death.
But one must be clear about one thing before making a contract. How much life insurance do I need to fulfill the requirements of my loved ones? There should be enough coverage to maintain the living of the heirs of the policyholder after his death. Life insurance coverage can be calculated in various ways:
Standard of living method
What kind of lifestyle the dependents of a policyholder have is the major determining point for insurance coverage. If he urges to give them a lush lifestyle, there should be more coverage than a regular lifestyle.
However, a general suggestion is to have a coverage of 10-15 times the annual expenses of the family.
For example, if a family spends $25,000 in a year, a policyholder should calculate the coverage amount by multiplying the $25,000 with the factor 10 to 15. Resulting amount suppose, 250,000 is the required coverage.
Annual income of an insured
When the policyholder dies, there is no more annual or monthly income to support his dependents. Insurance coverage will be a substitute for that income. Experts say that the coverage should be 8 to 12 times the annual income.
That amount will be enough to cover the financial needs of the family for several years. As they just don’t have household or academic expenses, they will have to pay the medical bills, extracurricular activities, and so on.
To calculate the coverage, the policyholder should multiply his annual income including the increments if expected with the factor 8 to 10, whatever he wants.
Future goals of family
While deciding the amount needed, one must keep in mind the future needs of his family. These requirements may include the marriage of children, higher education, or burial and funeral of parents.
Years left in retirement
Another method to calculate the required coverage is by the remaining years in retirement. You just have to multiply your annual pay by the number of years left in your retirement.
For example, if a 50-year-old person is currently earning $30,000 a year, he should have $450,000 (15 years x $30,000) in life insurance.
In addition to the above-mentioned expenses, one may have to cover certain expenses such as remaining personal debt, mortgage loan, car loans, or debit cards. You should add some extra portion for all these expenses while calculating the coverage.
If you have to pay $50,000 of a mortgage loan, $4500 of car loan, and $25,000 of personal loan, you must add $795,00 in previously calculated coverage.
Life insurance coverage, 10-15 times the annual family expenses or 8-12 times the annual income of policyholder is considered enough.
Dave Ramsey regarding coverage of life insurance
Being the voice of money in America, the words of Dave Ramsey are very important regarding the amount of death benefit in a life insurance policy. What does he suggest to the one asking how much life insurance do I need? by Dave Ramsey.
He straightforwardly says to have coverage that is 10-12 times the annual income of policyholders. As it will be a replacement for the yearly income of the supporter, so it should be enough to provide financial support until the dependents become stable and start earning.
Frequently asked questions
Life insurance is an umbrella term and hiding a lot of types inside it. People often ask various questions to understand the nature and working of life insurance. Some of them have been answered below:
1. Who should have life insurance?
Life insurance is a guaranteed payment to the survivors if their supporter dies. The following factors encourage someone to buy a life insurance policy:
You have a family who is dependent upon you
If you have younger kids who are unable to earn their living
You have stay-at-home parents or spouse who need financial support
Handicapped children dependent upon you throughout the life
You have to pay the mortgage loan, personal loan, or estate taxes
2. What is whole life insurance?
Whole life insurance is a kind of permanent life insurance that offers lifetime coverage along with the guaranteed death benefit to the beneficiaries of the policyholder.
Cash-value plan is the quality of whole life insurance that is not available in term insurance. The investment account keeps increasing because of the interest accumulation and policyholders can borrow against it.
3. Is it worth to have life insurance?
It’s a common concern of a person who is inclined towards buying life insurance that, is life insurance worth it? If you have dependents who can’t survive without your financial support, then yes, life insurance is surely worth it.
It will help the heirs of the policyholder to maintain their living if he faces an accidental demise. Life insurance is the companion of your loving ones when you are not with them anymore.
4. How much life insurance do I need Suze Orman?
According to Suze Orman, an American financier;
“Buy a term life policy with a coverage that is equal to at least 20 times your dependents’ annual expenses. With such a large face value, your family will be able to invest the money somewhere to earn the regular income.”
5. At which age you should stop term insurance?
95 is the number that alerts you to stop buying or renewing your insurance policy. Before this age, you can renew your term life insurance to be in force.
However, once you reach 95, you should not renew it and rather you should terminate it until you have a funeral or burial insurance.
6. What is the best life insurance company?
Best in overall life insurance policies is Prudential Financial. It was selected as the best insurance company due to the record of 140 years, providing a lot of life insurance policies, and due to exceptional feedback in the financial world.
Prudential has been working for 140 years and that much time is enough to make it reliable for the people of the business world.
How much life insurance do I really need? is the most asked questions by the people while buying an insurance policy.
Experts suggest that you should get a policy with coverage that is 10-15 times the annual expenses of your family or 8-12 times your annual income.
However, coverage of 6-8 times the annual income is also considered reasonable.