By Jeff Gilbert
Life is full of unpredictable events. If you start thinking about everything that could go wrong, you’ll give yourself gray hair and a hefty dose of anxiety. That’s where life insurance comes in. It may not solve all your worries, but it does protect your loved ones if the worst-case scenario becomes a reality.
But knowing you need life insurance is only the tip of the iceberg. Life insurance can be complicated and is not a one-size-fits-all product. Everything from the type of insurance you get to the amount of coverage you receive will depend on your unique situation. Even though there’s no exact formula, here are a few questions you can answer to help you evaluate your life insurance needs.
Is It Necessary?
Not everyone needs life insurance. If you have enough money saved so that your death would not create a financial hardship for your loved ones, an insurance policy might be an unnecessary line item in your budget. If you are a single young adult with no dependents, you may only need a small policy to cover the expenses of a funeral and burial. Take a good hard look at your financial situation and decide if life insurance is the right fit for you.
Permanent Or Term?
Now that you have an idea of how much coverage you need, you’ll need to choose the kind of life insurance that is most appropriate for your situation. Here’s a breakdown of the two primary types of life insurance.
Permanent insurance is coverage that is not limited to a specific duration of time, meaning it can potentially last your entire life. There are several types of permanent insurance, including Universal Life, Indexed Universal Life, and Whole Life. The benefit of permanent insurance is that it can last longer than a term policy so that a death benefit will be paid to your beneficiary no matter when you die (assuming your policy has been funded properly). This type of insurance is typically more expensive than term insurance.
Term insurance offers coverage for a specified length of time, which can be anywhere from 10 to 35 years. The downside to term insurance is that it only covers you for your specified length of time, so if you pass away after the term is over, no death benefit is paid to your beneficiary. But depending on your situation, you may only need insurance for a certain time period—until your kids are grown or you have enough money saved to avoid financial hardship. One of the major benefits of term insurance, as opposed to permanent, is that it is usually the most inexpensive out-of-pocket option.
What’s My Ideal Coverage Amount?
Finally, the question at the forefront of your mind. Here’s how to dig into the numbers to calculate how much coverage you need to protect your family adequately.
The DIME Method
Conduct a needs analysis by separating your finances into different areas:
- Debt and final expenses
- Education costs
In addition to these areas, two of the biggest factors that affect how much insurance you need are your marital status and your financial dependents. The more people depend on you, the more coverage you need.
After calculating and totaling each of those dollar amounts, apply an income replacement multiplier to determine your needed coverage amount. The multiplier varies based on your age and the status of your home mortgage. For example, if you’re under 50 years old, you can likely use a multiplier of 20. Older couples may be able to use a multiplier of 10 or 15, depending on the number of years left on their mortgage.
Keep in mind that these are just guidelines designed to give you a general idea of the amount of insurance coverage you need. There may be adjustments for your particular situation and what makes the most sense for your family.
Put It All Together
You now have a sheet of paper with a lot of different numbers on it. Here’s how to put it all together.
- Combine your annual income (plus the multiplier), your mortgage balance, your debt load, estimated future financial needs, and death expenses.
- Then subtract your liquid assets (think savings, life insurance policies you already hold, any college funds, etc.).
- The number you end up with should give you a general idea of how much insurance you should buy.
If you’re ready to take the plunge into life insurance, it can be helpful to talk to a financial professional and review your options. Our team at Balboa Wealth Partners is experienced with insurance policies and can offer you guidance on the products available to you and how they can integrate into your other financial strategies. If you have questions about your life insurance policy or would like to schedule a review or discuss your options, give me a call at 949-445-1465 or email me at firstname.lastname@example.org.
Jeff Gilbert is the founder and CEO of Balboa Wealth Partners, a holistic financial management firm dedicated to providing clients guidance today for tomorrow’s success. With nearly three decades of industry experience, he has worked as both an advisor and executive-level manager, partnering with and serving a diverse range of clients. Specializing in serving high- and ultra-high-net-worth families, Jeff aims to help clients achieve their short-term and long-term goals, worry less about their finances, and focus more on their life’s passions. Based in Orange County, Jeff works with clients throughout Southern California as well as Arizona, Oregon, and Washington. To learn more, connect with Jeff on LinkedIn or email email@example.com.
Advisory services provided by Balboa Wealth Partners, Inc., an Investment Advisor registered with the SEC. Advisory services are only offered to clients or prospective clients where Balboa Wealth Partners and its Investment Advisor Representatives are properly licensed or exempt from registration.
Securities offered through Chalice Capital Partners, LLC, member FINRA, SIPC.
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