Choosing a Life Insurance Death Benefit Amount
Many if not most households consider purchasing a life insurance policy of $250,000, an amount that probably sounds substantial to most middle income householders. But many sales agents remind their customers that although $250,000 sounds like a lot, it goes away quickly. That amount might not be nearly enough for some families, while it could be more than enough for others. Here are some things families should consider when trying to figure out what size policy they should purchase.
IncomeThe rule of thumb is to purchase a policy that would cover seven times your income. This can vary widely based on the policy holder’s income: if he or she makes $25,000, the policy should be at least $175,000. But if the annual salary is $100,000, the policy should be at least $700,000. But this can vary also, depending on several factors, such as: How many children do you have? How old are your children? Who’s the primary breadwinner? How easily can your spouse enter the workforce with a decent paying job if you die? How important is it for your spouse to be with your children several hours a day? How much is your mortgage, car payment and other debts? The list can go on. The bottom line is that a family’s greatest asset isn’t its house, its jewelry or its investment portfolio, but its primary breadwinner. If that breadwinner dies, the spouse could be left with the responsibility of raising children, paying off thousands of dollars in debt -- all while still grieving the loss of a husband or wife.
ChildrenLife insurance agents will usually advise their customers that the best time to purchase policies in their early 20s, hopefully while they’re still healthy. Customers who are considering life insurance and plan on starting a family in a few years should consider a policy that will cover their future children’s needs, from diapers to health care to education to an account for college. According to an MSN article, the cost of raising a child for a household earning $39,100 or less per year is $124,800 -- that’s about $7,000 a year for 18 years. The cost of raising a child for a household earning $39,100 to $65,800 is $170,460 -- about $9,470 per year for 18 years.
The cost could be even considerably higher if you factor in a solid education at a private school. And parents of children with special needs will require that the parent spend even more time with their children -- possibly even into adulthood. Families who don’t have children yet and are considering purchasing a life insurance policy should consider the budget of a family with children.
Mortgage paymentOften this goes with the income of the family. Households with a breadwinner making a substantial annual salary will usually feel more comfortable with a larger mortgage payment. But sometimes the cost of the house is still less than the cost of the vehicles, student bills or credit card debts. If the breadwinner dies, the spouse could be left scrambling to pay for all of these bills.
Health careIf the primary breadwinner had a health insurance policy with his or her company, the family is left suddenly without coverage, unless they opt to go with COBRA. But studies show that most families either can’t afford COBRA or aren’t willing to pay for it. Often a health insurance plan for a family can cost anywhere from $5,000-$12,000 a year, if not more. Families who want coverage should put that in consideration when deciding the amount of coverage from a life insurance policy.
BurialAs soon as someone dies, the family is left with one expense that will be facing them even before the mortgage, car bill or utility bill: the burial. An inexpensive funeral could cost just a little under $10,000, but in some cases they can cost $25,000 or more. Life insurance policy holders should also consider the extra cost to transport the body if it’s going to be transported to a different state or country. A small policy amount should cover the burial and funeral, but most customers will want enough money left over after the funeral to pay for basic family needs, such as food, clothing, utilities and debts.
There are many factors to consider when deciding on a life insurance coverage amount. While it’s impossible for anyone to know their exact financial needs in the years to come, customers should consider the specific areas that they would like the death coverage to pay for.
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