Life insurance is essential to provide peace of mind you’ll know that in the event of your death your loved ones will be well provided for and financial hardship will not add to their difficulties as they come to terms with your loss.
But how should you calculate how much you’ll need? Let’s look at some of the factors to take into consideration:
Whole life insurance vs term insurance
This is perhaps your first decision. Whole life policies give, as the name suggests, lifelong coverage. Part of your premiums will be invested, to give you additional support during retirement. They tend to be more complex and expensive than term policies, and you’ll need to be sure you’ll be able to continue paying the premiums for the policy to remain valid.
Term insurance policies have a fixed end date. They are usually cheaper and less complicated.
What will your beneficiaries need to cover?
To calculate the level of cover you should opt for, there are four main areas to consider. First, your outstanding liabilities such as mortgages, loans, credit cards, business commitments, etc.
Next, how much will it take to replace your current income, so that your family can maintain their standard of living for the foreseeable future? As a point of reference, the average salary for Canadian employees is roughly $54,630; for Americans it’s slightly higher.
Third, do you have children and will you need to cover their educational and medical expenses?
And finally, what would be the costs incurred as a result of your demise funeral costs etc.
What will your current assets cover?
Also, take your assets into consideration. What do you have in terms of savings or investments? If these are substantial, it may be possible to save money by reducing your level of life insurance cover without detriment to your family’s lifestyle.
How can you be sure the insurer will pay without delay?
Any delays in settling a claim can be frustrating and cause financial hardship at a time of great stress. Most companies will pay without issue, but if a claim is dragged out for any reason, or even denied, the best course of action would be to consult a life insurance attorney. They’ll be able to follow up on your behalf and negotiate if necessary. Ensure your beneficiaries are aware of this option.
Payment will usually only be withheld in unusual cases: perhaps if the policy has a large value and has been taken out recently, or if the causes of death remain unclear. Making sure that the value of your policy is in proportion to your family’s lifestyle will help to ensure that they receive payment without delay.
Summary
Although none of us like to dwell on the idea of our death we all know that it’s inevitable and could come at any time. Buying a life insurance policy is essential to protect your family and ensure they’ll be well taken care of in case of your demise.
Take an objective look at what they’ll need, financially, to maintain their lifestyle when you’re gone and no matter what happens, you’ll know that you’ve acted responsibly, and secured their future.
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Not everyone needs life insurance!! If you are over 65. own or rent, and have no one depending on you for support, you don’t need life insurance. It only pays out when you are dead. And, “burial” policies are a crock. The only one who profits is the insurance salesman.
Absolutely, Liz!
As someone who works in the industry, the biggest delays to paying claims comes from outdated beneficiary designations: deceased parents, ex-spouses, estranged relatives. Please keep these updated!
Also if youre looking at a $10,000 policy (or less), learn the discipline needed to maintain a savings account at that level. Youll be much better off.
Great comment, Terrence.