As we navigate life, we’re faced with so many decisions and choices that influence both ourselves and our loved ones. But the questions you have to ask yourself are so much tougher when you're trying to plan for a world without you there. How can I best protect my family? Will they be ok financially without me?
Life may be unpredictable, but we do have the ability to control whether your family will be covered financially after you pass. We all know life insurance is something we need — and you may even already have it. But it’s important to really understand what it is to make sure you have the best policy for you and your family.
Here’s what you need to do to calculate how much life insurance you need.
How to Calculate Your Needs
There is a standard equation when it comes to calculating how much life insurance you need: financial obligations minus liquid assets.
Add up the following items to understand your total financial obligations:
Your annual salary multiplied by the number of years you want to replace that income (experts recommend getting coverage that is 10-12x your annual income)
Future expenses, such as college funds, loan forgiveness, or funeral costs
The cost to replace services that a stay-at-home parent provides, such as childcare (if applicable)
Any additional debts
Once you have this total, subtract your liquid assets. This includes your savings, existing college funds, stocks, retirement investment accounts, and current life insurance policies.
The remaining amount is how much life insurance you need. If you’d like to input your information for advanced accuracy, you can also use a life insurance calculator like this one.
What is Term Life Insurance?
After calculating your needs, it’s time to choose which life insurance policy is best for your coverage. There are two primary options: Term Life Insurance and Whole Life Insurance. The biggest difference being that Term Life Insurance only offers coverage for a predetermined period versus permanent coverage. While both plans have their pros and cons, a Term Life Insurance plan is relatively much more cost-effective in the long run with generally low premiums and the flexibility to grow your coverage.
Term life insurance lasts for a specific period of time — often 10, 20, or 30 years. In exchange for your monthly life insurance payments, the insurer pays a death benefit to your life insurance beneficiaries if you pass during the term of the contract. And unlike other plans, Term Life Insurance expires at the end of each term.
The rates do vary depending on your age, gender, and health, but it is a great policy especially for young adults, couples, and families for a couple of reasons. For one, the low premiums offer a more affordable rate for a large payout. The death benefit also helps cover certain expenses that will eventually end, such as paying off your house or sending your kids to school. And with its flexibility to increase your coverage or switch to a permanent policy when the term ends, you can adjust as your family grows or your situation changes.
Other Tips to Keep in Mind When Understanding Your Coverage
If no one in your life depends on you financially and your death would not cause a financial burden to your family, then you may not need life insurance. But if someone you care about will need money once you are no longer around to support them, then Term Life Insurance may be best for you.
Life insurance should be considered a part of your overall financial plan. It should factor in the growth of your income and assets and be adjusted accordingly.
Talk with your family and make sure you’re on the same page. If you’re the sole financial provider, how much money would your dependents need to live without you? What future plans or possibilities could potentially influence this number?
When in doubt, consult a financial professional, steer clear of the biased life insurance salespeople. Having clarity on your policy is important, and if you don’t understand certain terms, a financial professional will. Review your coverage with your financial professional on a regular basis to ensure that the coverage you have is accurate based on your needs.
K Wealth Advisors If you’re looking for personal guidance as you start looking into life insurance policy plans, contact K Wealth Advisors to schedule a GoodFit meeting.
Insightful Planning to Live Your Best Life. #IPtLYBL
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