Do you have enough life insurance coverage? You might not have enough coverage through your life insurance from work. According to a recent LIFE Foundation and LIMRA Study, almost one-third of all Americans believe that they need more life insurance coverage.
LIMRA, a worldwide association of insurance and financial services companies, recently found that about 40% of people own a life insurance policy only purchase it through their employer. They do not have any other policies. There are a few issues with only buying life insurance from your employer. You may not have enough. But, there could be limitations and other issues. Help protect your Spouse’s financial needs with USAA Life Insurance. You can help protect your family and the life they enjoy with USAA Life Insurance.
How Much Life Insurance Do You Need?
Most people are underinsured. They are not receiving enough coverage for their life insurance from work and their employer. You may need to add more life insurance. But, how much more life insurance should you buy?
You Need 10x Your Annual Income
If you are like me, your life insurance from work does not provide enough coverage. I have a group life insurance policy from my employer that only covers approximately half of my annual income. This isn’t enough coverage.
Most financial and insurance experts recommend that you need to have life insurance benefits that pay out at least ten times your annual salary. So, for example, if you earn $50,000 per year before taxes, you should have enough life insurance coverage that would pay your beneficiaries $500,000 upon your death.
The problem is that most workers are not covered by their employer’s life insurance plan for the total 10x their income amount. So, they must find supplemental life insurance to add to the amount of life insurance from work. It is not the end of the world, but it is something that employees must recognize and a financial issue that must be tackled. Do not let this “To Do” item linger on your list.
Shop Around For Life Insurance
So, what is the best way to find life insurance if you are not getting enough life insurance from work and your employer? You should shop around for additional life insurance policies. When was the last time you called a life insurance agent to get a quote? Have you received a phone call from an old college classmate who has changed careers and becomes an insurance agent? Maybe now is the time to call him back and shop around for additional life insurance.
Additionally, you can find great additional life insurance policies online. You should compare life insurance online to find the best deals. It is free and very quick to receive several quotes on new life insurance policies. In most cases, you do not even have to input your email address or phone number in order to get a quick idea as to how much life insurance you could qualify for and what its tentative costs would be. Using online tools is a great resource to get ideas and quotes about new life insurance.
The website, CoverPath.com, recently came out with a free online tool that helps employees figure out how much life insurance that they should buy through their employer’s plan and how much they should add on their own through an additional life insurance policy. Cover Path’s online tool provides a transparent and easy to use way to help people make a more informed life insurance buying decision. It provides you with a quick snapshot of whether or not you have enough coverage, if you should get more, and can even provide you with some recommendations on where to turn next.
Cover Path’s online tool provides a transparent and easy to use way to help people make a more informed life insurance buying decision. It provides you with a quick snapshot of whether or not you have enough coverage, if you should get more, and can even provide you with some recommendations on where to turn next.
Don’t Let Your Perceptions Hold You Back
The LIFE Foundation and LIMRA survey also find that we have some misperceptions that are holding us back from getting the additional amount of life insurance that we need. The survey found that a vast majority of Americans thought that life insurance was too expensive. Because we often think that we cannot afford life insurance, we quickly dismiss it without another thought.
But, the reality couldn’t be further from the truth. The worry of high cost should not be a factor because it simply isn’t true. In fact, the cost of many term life insurance policies has been coming down over the past decade. There are many term life insurance policies where a healthy, non-smoker can find premiums as low as $10 to $20 per month for almost $500,000 in benefits.
Do not let the fear of high prices hold you back from purchasing additional life insurance coverage. The costs of term life insurance premiums are very low with respect to the amount of coverage that you can buy.
Determining How Much Life Insurance a Person Needs
There are a few factors based on which a person can determine how much life insurance coverage he/she needs. Here, let’s go through the factors in detail.
1. Your Monthly Expenditure
The first and most important factor to determine how much life insurance you need is the monthly expense of your family. How much money you need, every month, to maintain the living standard of your family? Do you have a mortgage or any debt to repay?
All these things must be accounted for before deciding upon the amount of money your family requires in case of income loss caused by your untimely death. Let’s say, for example, your annual salary is $30,000 and the monthly expense of your family is around $3,000. You have bought a life cover of $500,000. Your family receives the entire amount in the event of your death.
Now, the amount is quite sufficient for your family. But in case the monthly expenditure of your family was around $3,000, the yearly expenditure is around $36,000. In that case, $50,000 will not be sufficient for your family as it will financially support them for a period not more than 15months or so. Therefore, you must calculate the monthly (as well as yearly) expenses of your family to know how much life cover you need to buy.
You may also want to consider your funeral and burial costs when buying life insurance. You can purchase a separate life insurance policy for burial costs. Burial insurance doesn’t cost you a lot and can be a good addition to your life insurance coverage.
2. Your Financial Goal
Your financial goal refers to the amount of money you wish to have in your corpus so that you can maintain a better lifestyle in future or purchase something that you have always dreamt of (a house, a luxury car for example). In order to achieve your financial goal, savings is very important. If you want life insurance for your post-retirement years, and you have a significant amount of savings in your bank account, you will need less term insurance.
Pension plans or endowment plans are best for those who want life insurance for saving purpose. But, if you need life insurance for the future financial security for your family in your absence, there should be no compromise on the amount of life cover you need. The higher life covers the better.
You should have enough coverage to pay for your financial liabilities as well. So, it is very important to outline your financial goal as well as the cash-flow needs of your family. This will help you figure out the estimated amount your dependent family would require after your untimely death.
Do you have children who are currently in college? Do you have children at home that are still school-aged and will need to attend college in a few years? This is another prime consideration for how much life insurance coverage you need.
You should take into account how much a four-year degree is estimated to cost you to put your children through college. That cost needs to be added to the amount of life insurance coverage you purchase in addition to the amounts covering your debts, mortgage, and income replacement.
3. Available Financial Resources
It is necessary to calculate the financial recourses as well as the total annual income of your family. Do you have any savings (short- or long-term)? What is your spouse’s annual income? You need to add up these amounts with your 401(K)s, IRAs, emergency reserves, 529 plans, estimated social security survivor benefits and the existing life insurance plan (if any).
Now, find the difference between all the available resources you have and the financial needs of your family. This will help you figure out how much life insurance cover you will need for your family to sustain themselves after your death.
4. Inflation
Your financial planning remains incomplete without taking inflation into account. As years go by, the cost of living goes up. In other words, the general level of prices for goods and services increase with time.
Consequently, your current family expenditure will double within a few years (resulting in an obvious increase in your salary as well). So, while estimating the amount of life insurance you need, you must factor in inflation to understand what your family’s financial needs will be in the future.
It is also better to find a reliable premium calculator, which will help you find calculate the current rate of inflation and give an estimate of how much life insurance you can get with the premium you can afford.
5. What Other Debts Do You Have?
Like a mortgage, you should add any debts to your life insurance policy. You should not take out specific life insurance or riders for certain debts, but you should add the total amount of debt that you owe onto what you need to insure to replace your income.
This applies to all debts such as credit card balances, home equity lines, student loan debt, car notes, and the like. You should not saddle your heirs with your debts and bills. You should have enough life insurance benefits that your estate can clear your name and then continue to pass your assets to your heirs according to your will and last wishes.
If you still have an outstanding balance on your home mortgage, you should add that amount to your life insurance coverage as well. For example, if you had a $500,000 life insurance policy to protect the loss of your income, you would also need that amount plus the remaining balance on your mortgage in life insurance coverage. Then your estate could pay off your debt with the life insurance benefit and not burden your family with it after your gone.
There are so many factors that go into the decision about how much life insurance do you need. Not only do you need to consider having enough life insurance coverage to replace your income should you die prematurely, but you have to also have enough death benefit that will cover the repayment of your debts.
The last thing that you want to do is leave your family in a bind after you are gone because you did not decide how much life insurance do you need by taking into account these simple factors and planning accordingly.
Remember: Everyone’s situation is different. These are simply guidelines. You should also seek out the advice of a qualified life insurance agent to help ensure that you have enough life insurance coverage and the adequate type of insurance to meet your needs and the needs of your family.
Life insurance is an integral part of financial planning and its importance in our lives is undeniable. So, if you have always stayed away from buying a life insurance plan just because you had no idea how much life insurance you need, it is time to be serious about the future of your dependent family.
Five Insurance Policies You Do Not Need
I recently asked J. Money’s readers a couple of weeks ago which insurance policies after the normal life insurance, health insurance, car insurance, and home insurance that people should own. Some of the answers were great like recommending that people have renter’s insurance, umbrella insurance, or disability insurance. But, some of the other answers were downright scary.
There are so many planners and agents selling life insurance products that most people simply do not need. They often mistakenly buy life insurance as an investment, to pay taxes, build a nest egg, or even to leave a legacy. Most people often forget that life insurance is to protect your family from a sudden loss of income.
Here are five of my favorite insurance policies that I love to hate. You don’t need these five. Don’t waste your money on them.
Cancer Insurance
You should have proper term life insurance that covers ten years of your annual income. Having regular life insurance negates the need to have these specialty life insurance policies, and a term life insurance policy is cheaper than these additional coverages.
Insurance companies prey on our fears, and there is nothing scarier these days than getting cancer. But, if you have the proper amount of life insurance, then you do not need specific cancer insurance.
Accidental Death Insurance
Dying is dying. It doesn’t matter if it was an accident. You should not need additional insurance that pays out extra if you happen to die in an accident. A regular life insurance policy will pay out whether it was an accident or not. Do not waste your money on these additional insurance policies.
Flight Insurance
This is another insurance policy that is exactly like accidental death insurance. Did you know that you can actually buy flight insurance in some airports from a vending machine overseas? If you were to extrapolate the amount of insurance premium for the small amount of coverage time that is covered, flight insurance would be one of the most expensive insurance policies that you ever bought.
Pet Insurance
For most people, it would simply be cheaper to save for your pet’s medical needs. There are very few pet owners who need pet insurance. While it may make you feel better, it will end up costing you more money in premiums than you will ever collect by filing a claim. Insurance is designed to help you recover or prevent a catastrophic loss. Minor financial losses should be covered temporarily from your fully funded emergency fund.
Identity Theft Insurance
Identity theft is a hot topic right now, but that does not mean that you should run right out and purchase an insurance policy to cover you. While the Federal Trade Commission lists even a stolen credit card number as identity theft, it is a little more comforting to realize that completely stealing a person’s identity is extremely rare.
The problem with identity theft insurance is that it is very specific on what it covers, and it only covers a few things such as legal fees and time lost cleaning up your credit report. It also only kicks in after any homeowner’s or renter’s insurance pays out. Also, you may be footing the bill first and getting reimbursed only after you prove that you have been a victim.
If you are still worried, you can do what I did and freeze your credit report with the three credit bureaus and sign up for credit report monitoring
There is a danger to having too much insurance coverage. Insurance companies have professional, college-educated actuaries whose sole job is to calculate the odds of the insurance company having to pay out an insurance claim. The insurance companies use huge historical databases to determine the likelihood of certain events based on a host of other factors.
You can be sure that they have run the numbers and know for a fact that the expected value cost of paying out these claims is far less than what they take in on premiums. A vast majority of these insurances expire unneeded.
Do you have life insurance questions? Do you have enough coverage through your life insurance from work? I’d love to help. Send me an email Hank [at] MoneyQandA.com or leave a comment below.
I agree that pet insurance is a waste. A lot of policies don’t even cover serious illnesses, which is the whole point in the first place!
I have Accidental Death and Disability insurance through my job. So in that sense, in order to have disability, I have to have the accidental death.
As for pet insurance, most pet insurance is incredibly limited. In almost all cases it will not pay for the most common breed issues- like hip dysplasia in GSDs or eye problems in Sharpeis. In other words, it’s useless for the problems that your pet is most likely to face.
Pet insurance might cover routine visits (or it might not), but mostly it’s there to cover your pet being hit by a car. And that’s scary, but not likely.
Pet owners are really better served by having a pet fund- take the amount in premiums you’d pay every month and put that in an account specifically for your pet’s medical bills. Almost always, you’ll come out ahead.
I agree with these, though we had quite the scare with our pet last fall. After a $475 visit to a big pet hospital, we learned that she has a genetic condition that needs to be watched closely. Haven’t had problems since. Two years of pet insurance premiums would have been less than the visit, but you just never know.
My husband has accidental death in his work coverage – he’s a law enforcement officer, and this policy actually kicks into overdrive if he were to, say, be killed on the job. Since he doesn’t pay anything for it (it’s standard with his department’s benefits), I’ll take it!
I looked into cancer insurance several years ago because I had never heard of it. I ended up not buying.
When looking for insurance policy, it is really important that we know which ones are needed and not needed to avoid wasting the cash that we worked hard for. Pet insurance and cancer insurance are probably not going to be in my list. It is important to prioritize what we and our family can rely on when such a bad situation knocks on our life.