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How much life insurance should I buy?

How Much Life Insurance Should I BuyLife insurance is necessary for several reasons, especially if you have a spouse or dependents that rely on you for financial provisions. How much life insurance you buy depends on what your financial contribution to the household is.

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Some people believe you should buy enough life insurance to provide for your family for three years while others believe one year is sufficient or seven years is necessary.

There are several ways that you can calculate how much life insurance you should buy. This article will help explain the benefits of life insurance and explain to you one of the most common determinations of how much insurance to purchase to protect those you love.

The Basics of Life Insurance

While most insurance policies provide a benefit to the policy holder, life insurance provides a benefit only to the beneficiaries of the insured person. There are several types of life insurance you can buy, typically whole life or term life, and the coverage amount can range from less than $5,000 to over $1 million dollars. Per the policy that is purchased, when the insured person dies the policy will pay the death benefit to the listed beneficiary or beneficiaries if more than one is listed.

Whole life insurance is valid for the entire time that the insured person lives provided that all of the premiums are paid timely and the policy is current. Term life insurance is valid for the entire term for which the insurance policy is purchased. This means that if you buy term life insurance for a 20 year term, then your life insurance policy is in effect for those 20 years.

If you die during that term then your policy will pay the death benefit according to the insurance plan you purchased. However if your policy expires in 20 years and you are still alive then your policy simply terminates and no death benefit will be paid on that policy.

Deciding Who Needs Life Insurance

There are several debates as to who should have a life insurance policy and who does not need one. A general guideline suggests that anyone who provides financial support to a dependent, whether it is a spouse, child, parent, relative, or other person or persons, needs to have a life insurance policy to provide for that dependent.

One of the ongoing debates is whether or not everyone should have life insurance even if it is just enough to cover funeral costs. Since the average funeral can cost approximately $10,000 and not every estate has cash value to cover it, there is validity to the idea of having at least enough life insurance to cover your burial. Since death is rarely predictable, everyone should consider purchasing a basic life insurance policy when they have the opportunity. With life insurance, the sooner you buy (as in the younger you are) the cheaper your premiums will be. This leads into the next debate: buying life insurance for your children.

Many people argue the morality of purchasing life insurance for your children. Although nobody wants to consider the possibility of their children passing away at a young age, it is a possibility and it warrants the contemplation of purchasing life insurance. However, one of the biggest reasons to purchase life insurance for your child is not to provide funeral expenses for your child, but to procure life insurance for your child at an inexpensive premium rate that will lock in for life.

Since life insurance is cheaper the younger you are you can purchase a $10,000 life insurance policy for your baby for only approximately $2 a month. If your child tries to purchase a $10,000 life insurance policy as a 40-year-old adult, then that same policy could cost approximately $45 a month. Buying life insurance for your child does not have to have morbid consequences. Instead, it can be considered a lifelong gift of affordable life insurance. The question is whether the savings is worth it when your children have no dependents to care for.

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Determining How Much Life Insurance to Buy

The amount of life insurance to buy depends on several things, such as your lifestyle, the dependents you support, and how much you can afford in monthly premiums. Term life insurance is cheaper than whole life insurance, but it expires after a set amount of time and does not pay out any death benefit if the insured person survives past the policy termination date.

The younger you are, the cheaper you can buy a whole life insurance policy to be sure your dependents receive a death benefit. Some people cannot afford to purchase whole life insurance so they settle for term life insurance instead. If they have small children at home they may buy a 20 year policy to simply cover the childhood years. Your lifestyle can help dictate if term life or whole life is a better buy for your future needs.

To determine the amount of coverage to buy, a good guideline is to consider how much money you contribute to your dependents on an annual basis. When considering dependents you need to think about everyone who receives financial support from you. If you are the main bread winner in the household and you support your spouse, three children, and your parents, then you should calculate your contribution based on all of those family members.

If your annual earnings are $100,000 then a $100,000 life insurance policy would provide for your dependents for approximately one year. The longer you can provide for your family after you are gone, the more time they have to assimilate to the changes and find a different method of survival. Some experts suggest a minimum of three years for this to take effect and others say seven years is not uncommon.

Financial contribution to a household is not just based on physical paychecks that come into the home. There are many indirect contributions that affect a family’s budget as well. Consider the stay at home parent who is raising a family.

Even if the person does not earn a paycheck, there are substantial financial contributions. For example, imagine a stay at home mom who:

  • Cooks
  • Cleans
  • Does laundry
  • Provides daycare for her children
  • Runs personal errands, does the shopping, and
  • Chauffeurs the kids to school and to after school activities

Now consider how much it would cost to outsource all of those jobs and you have an idea of the financial contribution that is being made by this “non-working” parent.

All monies that are used to provide necessities to a family in order to survive comfortably need to be considered in planning on how much life insurance to buy. Life insurance can usually be purchased in conjunction with estate planning so that the maximum benefit is obtained. Although life insurance is not a pleasant consideration, it does need to be purchased in advance so that your family will not be left to struggle with financial difficulties while coping with the emotional grief of your loss as well.

The sooner you decide to buy your life insurance policy the cheaper you can lock in your annual or monthly rate. You may wish to consider buying life insurance for your children while they are very young and the rates are much lower. As you get older and your quotes for life insurance get higher, you may wish to decide on term life instead of whole life insurance.

While whole life provides you with a better benefit, it does come at a higher cost. Some financial advisors recommend a term policy and that you invest the difference on your own. To find a life insurance policy that meets your family needs but is still affordable to buy, compare different quotes online.

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