Do You Have Enough Life Insurance?

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Buying Life InsuranceOne of the most important things you can do for your family is to make sure that you have adequate life insurance. Life insurance isn’t for you; it’s meant as a way to financially provide for your family after you are gone.

It’s not pleasant to think of your own demise in this way, but you need to prepare. And it doesn’t matter how young you are. It’s important to be ready with life insurance anytime there are people relying on you.

According to recent research by ING, more than 80% of the population has life insurance. However, most of those with life insurance (66%) get a benefit through an employer. While this can be helpful to your family, you might not actually have enough life insurance to help your family replace your income.

Instead of relying on a minimal amount provided by an employer, it’s a good idea to think about your life insurance needs on an individual basis.

Choosing Enough Life Insurance Coverage

Scott Halliwell, a CERTIFIED FINANCIAL PLANNER™ with USAA, doesn’t believe that rules of thumb are the way to go. “When it comes to life insurance needs,” he says, “everyone’s thumb is different. The right amount of insurance is going to vary by situation.”

Halliwell recommends a needs-based approach: “How much does one need to ensure his or her survivors are able to do and accomplish the things they need and want?” He breaks down the decision to get life insurance into Requirements and Resources:

  • Requirements: These are items that need to be covered by insurance. They inclue final expenses (Halliwell says that funeral and legal expenses can “easily add up to $20,000”), debts — including the mortgage — that need to be repaid, future goals like college funding and retirement, and the maintenance of a specific standard of living.
  • Resources: Life insurance might not be the only resource available to your family after you pass on. Some of the resources you can consider include cash, savings, retirement investments, other investments, Social Security benefits, employer survivor benefits, and sellable assets.

“Having worked through this process, it’s a simple question of determining how one’s available resources stack up against the requirements,” Halliwell says. “The difference between what’s needed and what’s available is how much life insurance you need.”

Do You Have Too Much Coverage?

There are instances in which you might have too much coverage. Billy Van Jura, an Insurance Consultant with Birchyard LLC, points out that you need to be careful about what you choose to do: “Don’t let a salesperson turn you into a transaction with some sort of life value calculator.” He also points out that you need to make sure you can afford the insurance coverage that you purchase.

Scott Silverman, Vice President at Pacific Resources, also has a similar take on buying life insurance. “Many people don’t know if they have the right amount of life insurance because most of us are used to thinking in nice round numbers — $250,000, $500,000, $1,000,000 — when it comes to coverage amounts. Not many of us think through the amount we really need.”

Instead of just choosing a coverage amount, actually go through the process of determining your true needs. “As the consumer, make sure that you are buying something as opposed to being sold something,” Silverman says.

Treat your life insurance purchase as you would other important buying decisions. Understand your own needs, and consider worst-case scenarios. Be sure to understand all of the components of your policy, and buy from someone who can explain your policy to you. “Your agent should be able to explain everything to you layman’s terms,” Silverman points out.

In the end, only you really know if you have enough coverage. Make it a point to sit down and think about the life you want your family to have, and then buy the coverage (that you can afford) that fits those needs.

(Photo: moolanomy)

{ 7 comments, please add your thoughts now! }

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7 Responses to “Do You Have Enough Life Insurance?”

  1. I am one of those with life insurance only through my employer. I do plan on getting a term policy closer to when we plan to have kids.

  2. admiral58 says:

    I would get more once I buy a house or have a kid

  3. poscogrubb says:

    I haven’t read Bargaineering in awhile, but upon returning to this blog and reading this article, I’m disappointed. This article had nearly zero helpful content. It didn’t even come close to helping me answer the question of whether I have enough life insurance. You mention a needs-based approach. But what needs are needs that should be covered by life insurance claims? How do I balance what I need with what I can afford? What are some needs that I should be considering? What are some worst-case scenarios that I should be considering?

    • Miranda says:

      Really, your needs vary according to situation. As mentioned in the post, some of the things to consider include:

      *Final/funeral expenses
      *Paying of debt, including the mortgage
      *Whether or not you want to cover college for kids
      *Income replacement so your family can maintain quality of life

      As also mentioned in the post, don’t forget to consider whether or not your partner has the means to earn income after you’re gone.

  4. Fabclimber says:

    Make sure you have an attorney – that knows insurance law – review the policy prior to purchase. And get a complete list from the company, not the agent, of exclusions for any insurance policy you buy.
    Times have changed and insurance compaies are using every legal gimmick to deny claims, especially for amounts over 50k.
    One provision to ask for is that the company will pay for your attorney if they lose a claim dispute. Also, forget about it if the policy states that you must submit to arbitration. The arbitrators are contolled financially by the insurance companies. They will invariably rule in favor of the company.

    • njblue82 says:

      Fab, do you have proof of your theory that LIFE companies are trying to deny claims at death of the insured? My understanding of insurance law is that even if the insured lies on the app, the life carrier is still obligated to pay a death benefit consistent with the truth (i.e. adjust the premium retroactively to what should have been paid with a truthful application).

    • jim says:

      I know insurance companies will go to great lengths to deny claims on homeowners, auto, or boaters insurance, but life?? On what basis could an insurance company possibly deny a claim for life insurance? Either the insured is in the coffin or not, right?

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