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Insurance 101

How much life insurance do you really need?

Insurance 101

How much life insurance do you really need?

Calculating the amount of coverage that’s right for you.

Back in the early aughts, there was a show on MTV called Cribs. They’d tour the homes of celebrities and give you a look at the lavish lifestyles they lived. From indoor movie theaters to 14K gold ceilings, it’s hard to imagine maintaining such an expensive way of living.

Most people in the non-celeb world tend to live more modestly. While there may be things you want for a touch of luxury, there are also things you need to have a good quality of life. One of the needs, in our opinion, is having a life insurance policy. So, what factors into how much life insurance you need?

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  1. A breakdown of term and whole policies
  2. How to calculate coverage
  3. It’s not just about bills

A breakdown of whole and term life insurance

Before we get into the nitty-gritty, let’s talk about the differences between the two most popular forms of life insurance: term and whole policies.
Whole life insurance is a coverage plan that covers a person for their entire life. Once a customer is approved, they pay a fixed amount, typically monthly or annually. Their  loved ones can then use the full coverage amount when they die.

There’s also a cash value attached to whole life insurance. They can borrow against the policy for money if they need to while they’re alive. While this is a great asset, they may have to pay that loan back before they die. If the loan isn’t paid, the death benefit could have a lower amount and value. Also if the policy is canceled before death, they may have to pay steep tax fees on it. No bueno.

Term life insurance is simpler in the best way possible. A customer gets approved for a policy for a specific amount of time, hence the word “term”. They then typically pay a premium amount every month. Term lengths are usually in 10, 20, or even 30-year increments. Some insurance companies will let you customize the term length and how the death benefit is to be used (shameless Wys plug here). Your loved ones can take control of it once you kick the bucket.

How to calculate coverage

We now know how whole and term coverage works. The next step is to understand how much life insurance you need. There are some typical costs most people gather in their lifetime. Policyholders should make sure they have enough money in their death benefit to cover these things.

Mortgage: If you own your home, you already know how much money you spend a month. Calculate that monthly mortgage cost with the total amount left to pay off your house or apartment.

Bills: Bills can add up, from having running water to keeping the lights on. Total the full amount of utility bills to make sure you set enough aside.

Groceries: Everyone needs to eat, and groceries can definitely be a considerable cost. Inflation is at its highest in decades, and the price of food has risen as a result. Tally up what your average monthly cost is when you go to the supermarket or make an online order.

Entertainment: While being responsible is necessary, we all need a break once in a while. From setting money aside for the movies to treating your family to a luxurious Caribbean cruise will give your loved ones much-needed relaxation.

College tuition: If your kids have their sights set on furthering their education, you should think about the cost of each semester. When adding up your coverage, consider if they aspire to attend an ivy league university, four-year college, or trade school. Also, consider having money available for your children to pay off private student loans.

Weddings: Do you want to gift your best friend her wedding or hire a celebrity DJ for your son’s special day? You can have the death benefit cover those nuptial bills.

Retirement: Studies have shown that one in four Americans don’t have retirement savings. The cost of living past age 65 is estimated to be $1,120,408 in the United States. Having money set aside can help your spouse get what they need during their later years.

Debt: From car loans to credit card bills, you should total up the amount of debt you would leave behind. Some companies allow you to consolidate your debt into just one bill, making it easier to pay off.

A chart listing different bills

It’s not just about bills

Covering the things you need in your life is great, but life insurance can also cover things that are outside the box.

Maybe you want to leave a significant amount to your favorite charity. Perhaps it’s paying for dinner for your mom for the rest of her life. You can set money aside and have a park named after you in your favorite city. Is your pet ferret your favorite non-human mammal? Leave the little guy in the most luxurious ferret farm your heart desires.

Leaving a legacy is just as important as making sure your family can pay for their house and put gas in the car. It’s a way to leave your mark on the world for the people you love.

The opinions we expressed in this post are for general informational purposes only and are not intended to provide specific advice or recommendations.