Amazing but true: buying life insurance is one of the most important moves you can make to solidify your personal finances, yet it is also one of the most complicated. It’s extremely difficult to compare life insurance policies. On top of that, life insurance has its own jargon that is enough to make anyone head for the aspirin bottle. It doesn’t help, of course, that buying life insurance means coming to terms with your own mortality. Great.
Nevertheless, if you have dependents but your assets wouldn’t provide for them adequately after you die, you need life insurance. By contrast, if you’re single and have no dependents, you probably don’t need to buy life insurance since no one is relying on your financial support. A life insurance agent may argue that you should buy a life insurance policy to cover the cost of burial when you die. But you should have enough in savings for this expense.
How much life insurance do you need? The simple answer: Enough to sustain your family’s present standard of living and let them meet their financial goals in the event that you’re no longer around. If you’re married and the only breadwinner, your life policy’s death benefit –the face amount of the policy collected by your beneficiaries after you die –together with your other assets should be large enough to deliver lifetime income for your spouse. If you have kids, you’ll need to provide income for them, too, until they leave home, as well as a tuition fund if you intend to pay their way through college. If both you and your spouse work and earn income that the family relies on, both of you need coverage.
But putting a dollar figure on the exact amount you need is trickier than you may think. The rule of thumb that says you should insure yourself for five to seven times your annual gross income is far too simplistic. Instead, meet with a life insurance agent or a financial planner who can do the calculations to match your situation. Many personal finance software packages can also handle the calculations right on your personal computer –with no salesman in the room!