Do you have enough life insurance to protect your family in the event of an accident? This is a question I received recently, unfortunately many people don’t know about it. After all, death and an aggressive life insurance agent are two things most people would probably rather not have to deal with.
But this is an important question. If you don’t have adequate life insurance, your family could be in financial trouble. On the other hand, if you buy too much, you could end up wasting thousands of dollars on things you don’t really need. When deciding how much life insurance to buy, you should avoid the following misconceptions:
1. Everyone must have life insurance.
Life insurance has two main functions. It is most common to provide services to people who are financially dependent on you, such as children, and perhaps a spouse. The second is paying estate tax so your heirs don’t have to sell the property or business in return.
If you have no dependents or taxable estate (currently over $12.06 million), you may not need life insurance. Remember, the insurance company collects the premium, invests the money, then pays the fee and makes a profit on the difference. This means that, on average, most people are better off skipping insurance and investing on their own, as the insurance company pays less than the total amount they receive plus the return on investment. On the other hand, your family members may be among the few who actually need insurance. As with all insurance, it’s important that you have the amount you need, but that’s about it.
One last point is that even if you don’t currently need life insurance, you may want to buy it now. Because if your health deteriorates, it may become more expensive, or if you need it, you may not be able to buy it at all. So if you anticipate needing life insurance in the future, it’s best to buy it whenever possible.
2. You need insurance to pay off your debts.
This is a common myth. Many people worry that their heirs will inherit their credit cards or other debts they may accumulate. While debt can reduce what you leave to your heirs, unless the debt is joint, joint property, or has a co-signer/guarantor, the excess debt goes away with you.
3. Everyone needs life insurance to cover funerals and other final expenses.
Purchasing life insurance for this purpose is probably the most expensive form of financing. If your heirs inherit savings or other liquid assets, they can pay these fees at any time. However, if your debt is wiping out your estate, a small final cost policy may make sense rather than leaving that burden on your heirs.
4. Everyone needs enough insurance to fully replace their lifetime income.
Life insurance agents tend to like this method of calculating life insurance needs because it’s fast and generates a lot of insurance demand, but do you really need to replace all of your income for the rest of your working life? There are some issues to consider here. How many years of financial support does your loved one need? If you only have one 15-year-old, that’s probably 7 years closer to college than the 20 years you have to retire.
Have you checked the Social Security website to find out which survivor benefits your family is entitled to? These benefits are often overlooked and can be very important, especially if you have children under 18 (or 19 as long as they are full-time students). Finally, don’t forget that some costs (such as health care) may increase if your spouse is dependent on your employer for benefits and child care. You can use a calculator like this to estimate how much you need.
5. You don’t need to worry about your life insurance after purchasing.
People tend to buy life insurance and forget about it, but a change in your financial situation or your family’s birth, death, marriage or divorce may require you to change the beneficiary or the amount of coverage you need, which needs to be updated. With rates falling over the years due to increased life expectancy, it’s also a good idea to see if you can get the same amount of coverage at a lower cost, especially if your health or lifestyle has improved. Sites like term4sale make it easy to compare rates for cheap term policies online. Make sure you have a new contract before cancelling the old one.
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