How does a person know if life insurance is needed? And how much life insurance is enough? That all really depends on your own family and financial situation, but most adults with children do need life insurance. Life insurance is not for you, it’s for the people who depend on you and the money you make. If you died, that income would be gone. Life insurance replaces that for those who depend on it.
So, who really needs life insurance?
- single parents with minor children
- married parents with minor children (whether the parent works outside the home or not)
- married couples without children
Of course wage earners with children have a need for life insurance because the point of it is to replace those wages and the payout from the life insurance should be used to care for those children. Parents who do not have a regular income may still want to have a life insurance policy. Why? Because the role that parent plays still has a monetary value if that parent were gone. A stay-at-home mom most likely does all of the shopping, cooking, and chauffeuring of the children to their activities. If she were to pass away, the dad may have to hire a housekeeper or nanny to help ease the burden. And married couples without children may want life insurance to help take care of the surviving spouse in the event one of them dies.
Young, single adults do not usually need life insurance in order to financial take care of a dependent, but they may want a small policy to cover funeral costs if something were to happen.
So, how much life insurance do you need? A good rule of thumb is to take your annual income and multiply that by 10. The idea here is that the life insurance payout, invested properly, should generate enough growth for the survivors to have an annual income (from the payout) that is equal to (or close to) what the deceased was making in a year. For example:
A parent making $60,000 per year would need a life insurance policy of $600,000. If that were invested well (with a financial advisor) it could potentially grown by 10% per year. That 10% could be taken back out of the investment account each year, giving the family $60,000 annually to live on and leaving the $600,000 in the account to continue to grow.
For a the stay-at-home parent, you would follow the same concept, but instead of multiplying the annual income by 10, you would want to estimate the cost the family might incur in a given year by hiring a housekeeper or nanny, and multiply that by 10.
Now, what kind of life insurance do you need? There are multiple types. Term life provides coverage for a specified number of years. Whole life combines the insurance with a savings plan, and covers the policy holder for life. Then there’s universal life, variable life and variable universal life. Without getting to far into the weeds, think about who your dependents are and how long they will be needing the income. Typically, the savings component of the whole-life policy does not pass on to the family upon death, so you’re really only getting the death benefit there. And the savings portion doesn’t have a lot of variety in the ways you can invest that money. The term life has an end date, so if you had a 20-year term, you would pay the premiums and your dependents would be covered for 20 years. If you die in that 20 years, your family gets the money. If you survive that 20 years, your policy will expire, but your kids should be grown and no longer dependent on your income by then. It’s really up to you which kind you want, but there’s no good reason to get more than your family needs.
So now what do you do with all this information?
- Examine your life insurance needs before making a purchase.
- Learn about the different types of life insurance.
- Shop around and compare cost of policies from several companies licensed in Oklahoma.
- Buy only the amount of life insurance you need and can
- When you have narrowed your choice to several policies,
request a copy of each policy. Read the policy and ask
about anything you do not understand before you buy.
- Provide accurate information on the policy application.
Omitting health information can cause denial of your application or cancellation of the policy.
- Inform family members about the kind and amount of life
insurance as well as location of policies.
- Review your life insurance coverage and beneficiaries
whenever your family status changes. It is important to
determine if the coverage meets your current needs.