People need insurance for many different reasons. Adequate insurance coverage, or lack thereof, can have a huge impact on your financial life and long-term goals. One of the most common – and most important – insurances people choose to purchase is life insurance. But it also invariably causes the most questions: Do I need life insurance for myself? What about for other members of my family? And how much is enough?
Who Needs Life Insurance?
Life insurance analysis is an important step in ensuring financial protection if a death occurs in your family. The amount of insurance you purchase should cover cash flow needs, debts and other goals – such as ongoing expenses, funding education or retirement – in the event of death of a significant earner in your family. Because of these reasons, however, not everyone necessarily needs life insurance. Typically, single people with no dependents are less likely to need life insurance, people nearing retirement are generally less likely to need it, and those with a high level of net worth will likely require less life insurance needs except in certain estate planning circumstances. Talking to an advisor can help you determine your insurance needs
How Much Life Insurance Do I Need?
Once you’ve decided on life insurance, how do you know how much you need? While everyone’s circumstances are unique, you should think through all the things that need to be taken care of if you or another household provider is no longer around. Another way to look at it is: if I died, how much would my spouse and/or dependents need to be ok? And if my spouse died, what would we need to be ok? Consider any of the expenses in your day-to-day life, including:
- Replacing your annual income that covers daily living expenses for your spouse and dependents
- Paying off a home mortgage or any other significant debt
- Covering any consumer debt (credit cards, car loans, etc.)
- Paying for childcare, including savings for future college expenses
- Paying off unpaid medical bills or taxes
- Creating an inheritance or providing extra retirement income with a tax-free death benefit
There is no “one-size-fits-all” life insurance policy, and covering all needs is not always what everyone wants. It’s best to do some research and think through what you would want covered if something was to happen to either yourself or a spouse. Talk to a professional to ensure you purchase the right amount of coverage for your family goals.
Personal Capital Life Insurance Strategy
At Personal Capital, we model the effect of losing one or both wage earners on the surviving family’s savings and spending goals in our Monte Carlo-driven Retirement Planner, then we use that simulation to calculate the probable amount of current assets required to keep those goals on track. That amount (after subtracting current savings) gives us a better understanding of the amount of life insurance coverage that will be required to meet your goals.
Personal Capital Insurance Series
Term vs. Permanent Life Insurance
Whole vs. Universal Life Insurance
Do I Have to Buy an Annuity?
CASE STUDY: Permanent Insurance and a Down Payment
All insurance analysis and insight provided is extended to you as a courtesy for educational purposes only. You should not rely on this information as the primary basis of your insurance planning decisions. We are not licensed insurance professionals. You should consult a qualified licensed insurance professional regarding your specific situation.
Amin Dabit, CFP®
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