How to make sure you have enough life insurance

Life insurance ownership has steadily declined since 2011 from 63% of consumers to 53% according to LIMRA. As part of the same study, 42% of consumers say they would face financial hardship within six months if the primary wage earner died.

A life insurance policy is an affordable way to protect your family. When you’re purchasing a policy, you’ll want to consider how much money your family would need to maintain their standard of living so that they are sufficiently protected. 

“Many folks say they can’t afford the amount of insurance that is actually needed. But if you take time to think about it, insurance should be the foundation of your financial plan,” says Matthew Barr, a licensed life insurance agent and an agency supervisor at the Loyal Christian Benefit Association, a life insurance provider.

Most people need at least 10 times their income in life insurance coverage, if not more. But everyone’s life insurance needs depend on their own unique situation and the exact amount of coverage needed varies from person to person. When calculating your life insurance, you should make sure that it equals all of your financial obligations, and lasts as long as your longest debt, such as a mortgage. 

What is life insurance and who needs it?

Life insurance protects beneficiaries from financial hardship if someone they relied on for money dies. For many families, the death of a primary income earner means the loss of money for basic needs and payments for education or a mortgage. Anyone who has financial dependents needs life insurance.

Life insurance is also used to cover debts and expenses. Seniors purchase final expense insurance to cover funeral costs, while wealthy people purchase life insurance to fund estate tax liabilities. Business owners buy life insurance to cover bank loans or partner buyouts.

How much life insurance do I need?

Generally, most people should get at least 10 times their income in life insurance coverage, if not more. Sometimes, this number should be 15. Additionally, the coverage should last as long as your longest financial obligation.

Barr says determining your needs is the most important factor in having adequate life insurance coverage. Start by tallying up the amount of money your family would need to meet financial obligations — like the mortgage, college tuition, utilities, food, clothing, and debt payments — if they can’t rely on your salary.

Look at your current situation and say: ‘If I were to die today, what amount of money would my family need so they could continue to live the lifestyle they do now?'” Barr says.

To make sure you have enough life insurance, use Insure.com’s life insurance calculator to figure out how much coverage you need. The calculator will ask you about your income, final expenses, debt, and education funds to help determine your family’s needs. You may want to consider other needs as well.

Fabric, a Brooklyn, NY-based life insurance agency, suggested adding up fixed costs, such as current debt, mortgage balance or long-term goals like paying for your children’s college education. You may also factor in income replacement funds to supplement your partner’s income for several years. Also, think beyond what you’re bringing to the family financially. You may have to factor in childcare, too.

Fabric said stay-at-home parents need to consider life insurance just as much as income-earning partners. Stay-at-home parents handle childcare, housework and other tasks that may become expenses if the parent passes away.

If you’re underinsured, Barr says it’s important to sign up for life insurance as soon as possible.

“In some rare cases, if folks wish to try to lose weight first or quit smoking, it may be in their best interest to get their health situated first, but this still doesn’t fix the fact that they continue to age, which means their rate continues to increase each year they put off applying for more coverage,” he adds.

“The vast majority of people in the United States are underinsured. People don’t understand that you may not be able to get life insurance in the future if your health changes, so you want to lock in a rate. If it’s term insurance you can convert it later. The point is getting enough life insurance now,” says David Morales, a financial advisor with New England Financial, a Mass Mutual firm.

How to choose the right type of life insurance

There are two types of life insurance: term and permanent. Which one is right for you depends on what you can afford, what you want from your life insurance and your life situation. However, when choosing between term and permanent most people will find term life insurance to be the best option due to its affordability and simplicity. 

Term life is for a limited number of years, commonly 10 to 30 years. Term life is good for people who:

• Want a cheaper policy
• Only need a policy during high-earning years
• Won’t have a large estate to leave behind

Permanent life insurance, such as whole life, lasts for life as long as you pay your premiums. There are also hybrid plans like universal life and variable universal life. Permanent life could be the right choice if you:

• Have long-term dependents
• Have maxed out other investments and want an additional investment vehicle
• Have a large estate that you’ll leave to your loved ones and need to cover estate taxes

“Personally, I feel one should have enough death benefit to provide for the people and causes that you want to protect even when you’re gone. This, of course, varies by individual, according to their values and their personal situation,” Janine Golding, executive vice president of The Archer Financial Group says.

How to make sure your policy always works for you

Having a life insurance policy doesn’t mean you never have to think about it again. You should perform a financial checkup annually or close to it.

“Sometimes it’s very brief if not much has changed,” says Golding.

Your life insurance needs will change as your life changes and you experience major milestones. You should reassess your life insurance needs when:

• Your income changes
• You get married
• You have children
• You buy a new home

“All these personal considerations figure into the amount of insurance coverage you might desire. There is nearly always a way to adjust your insurance accordingly,” Golding says.

Not re-considering your policy at those times can be a mistake, especially for single-earner households.

Why you shouldn’t rely on group life insurance

Group life insurance is usually not enough coverage. Employers often offer group life insurance to employees at no cost or low cost, but the policies tend to be low in coverage.

An employer’s group life insurance is nice to have, but you shouldn’t think of that policy as your sole life insurance. Here’s why:

• It’s often connected to an employer or association. So, you’ll likely lose it if you leave your job.
• Fewer riders, so you can’t add on other protections like long-term care.
• Low death benefits.
• An employer can take away coverage later, so there’s no guarantee it will be there when you need it.

For these reasons, group life insurance should only be used to complement your life insurance policy. However, group life coverage is better than nothing if you can’t get any other life insurance policy. Just make sure you’re saving in another way, too.

“The biggest reason you might not want to buy life insurance through your employer is the risk that you might leave your job. While you can convert your group policy into an individual one, it will be expensive,” Ellis says.

Stay protected: Don’t risk going without coverage

Term life policies are one way to get life insurance, but you may outlive the policy. These policies, especially ones with short periods, are usually cheaper than permanent life insurance.

If you outlive your term life policy, you’ll need to decide what to do next.

Some options you have:

• Renew your policy. This will cost you more since you’re older than when you got your first policy.
• Buy a new policy. This can be pricey depending on your age. However, if your term life policy ends in your 20s or 30s, you should be able to find an affordable term life policy depending on your health.
• Convert to a permanent policy. Many term life policies let you convert to a permanent policy.
• Buy another type of coverage. Consider final expense life insurance.

How to save on life insurance costs

You can’t control Father Time, but there are ways to pay competitive life insurance rates.

Fabric says the life insurance policy influences the premium costs. Term life is generally much cheaper than whole life for the same coverage. Also, age, health and lifestyle are keys to life insurance costs, so it’s wise to apply when you’re young and premiums are cheaper.

Your first step is to improve your health and stop smoking. Life insurers base rates on the risk of you dying. If you’re in poor health, you can expect to pay higher premiums or to be denied coverage altogether.

“Life insurance is based on two simple factors. One, how much insurance you are applying for, and two, your age and health,” Barr says. “There are no sales when it comes to life insurance. You may qualify for a better rate based upon being healthier than normal; however, this is the same price offered to other healthy individuals your age.”

Another key way to save is to ensure you do your due diligence to find the best coverage you can afford.

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