How Much Life Insurance Do You Need?

The Basics of Buying Life Insurance

If you have dependents, you’ve likely considered purchasing life insurance at some point in time. And who would fault you? You have loved ones who count on you to provide for them. Life insurance is a significant financial investment and it’s a purchase most people make only once or twice. So, it makes sense that people aren’t familiar with all the complexities that come with purchasing a policy. If that’s you, don’t worry, here are some tips to consider while completing your research.

Know the Basics of Different Policies

While there are different life insurance products, there are two main categories of life insurance: “term” and “permanent” also known as “whole.” The main difference between the two categories is their duration.

Term life insurance lasts until a certain date, after which the owner no longer needs the policy, and it ends. There will not necessarily be a payout of funds in term life insurance.

Whole life insurance, on the other hand, lasts for the owner’s lifetime and the company is expecting to make a payout when the owner dies.

Most people’s life insurance needs end when all of their children graduate from college or when they’re ready to retire. So, most people will need a term life insurance policy at one point or another.

For those who have responsibilities that will outlive them, like having dependents with long-term care needs or dependents with special needs, or estate taxes which must be paid after death, a whole life policy would be appropriate. Similarly, if you want to build up the cash value of your life insurance policy to eventually borrow against it, you’re looking at whole life insurance.

You may also want to consider adding a living benefits rider to your policy. A living benefits rider allows you to access the death benefit while still being alive. Two common living benefits riders are an accelerated death benefit rider and a long-term care rider. An accelerated death benefit rider could pay out as much as the entire death benefit if you’re diagnosed with a terminal illness. A long-term care rider could pay out part of your policy’s death benefit if you are found to require long term care and health insurance won’t provide coverage.

Know How Much You Need

The best way to end up buying a policy that doesn’t meet your needs is to not know what your needs are. While there are different ways to calculate how much coverage you may need, the D.I.M.E. method is a preferred method of ours. D.I.M.E. is an acronym that stands for Debt, Income, Mortgage, & Education. To calculate the amount of policy coverage you need, add your Debts, other than your mortgage, your Income multiplied by the years your dependents would need to be supported, the amount needed to pay off your mortgage, and education expenses for your kids through the end of college.

While D.I.M.E. is comprehensive, is not exhaustive. For example, if you or your spouse are a stay-at-home parent, you should consider the cost of childcare and other domestic services when determining your policy needs.

Know Who to Name

Every life insurance policy should have a named beneficiary, so the insurance company knows who to distribute the funds to. You may think it’s a good idea to list your children, especially if they’re your main motivation behind all this. However, it might be the most inadvisable course of action. If the policy pays out while your children are under the age of eighteen, a court will have to appoint a financial guardian who will oversee the funds for a fee. Then when your child turns eighteen, they will receive what remains outright with no supervision.

Instead, you can leave the payout in an trust and name your children as beneficiaries. This way you can leave instructions on how to distribute the funds and even leave them protected from any future creditors, judgments, or divorces your children may have in the future.

TealAcre Is Here to Support You!

You read this far because you’re care about your providing for your dependents. And you’re interested in life insurance because it’s a way to provide for your family, maintain your business, and take care of your employees should something happen to you. Instead of going at it alone, let TealAcre help you get the clarity and peace of mind you’re looking for. To contact us you can:

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