Life Insurance - Who Needs It?

What is Life Insurance?

Life insurance is simply an insurance that makes sure your family is taken care of financially in the event something should happen to you. Ideally you should have enough life insurance to cover the loss of your income and the cost of your funeral expenses.

Do You Really Need Life Insurance?

While life insurance is important, not everyone needs to purchase it. A young, single person with no dependents doesn’t really need to think about leaving a lot of money behind in the event that they die. However, a young person might want to purchase a small amount of life insurance to assure their insurability when they are older and settled down with a spouse and family. Buying insurance when you are 20 will also help you to lock in lower rates that will benefit you when you are older.

If you have a spouse, children, or even parents that you are supporting, purchasing life insurance means that your family will be financially stable if something should happen to you.

Obviously the main household wage earner should have life insurance. If that person were to die, their wages would suddenly disappear from the household budget and that could mean the family must take a drastic change in their lifestyle. The secondary earner should also have life insurance. Even if you don’t work outside the home and don’t contribute an actual paycheck to the monthly expenses, you should have life insurance. If something were to happen to you, think how much it would cost to hire a babysitter, maid, and or cook to do all the things you do everyday.

How Much Life Insurance Do You Need?

If you want to determine exactly how much life insurance you should purchase, estimate how much money your family would need to survive if you weren’t around. Don’t just figure in your income. Figure in the cost of services you provide, whether it is mowing the lawn, taking care of the kids, or cooking the meals. All of these services will still need to be preformed, even if you aren’t around and the cost of hiring someone to do these things is something to think about when you purchase life insurance.

Once you have figured out just how much income your surviving family will need each month, calculate how much in total it would take to generate that annual sum, if you invested a lump sum of insurance money conservatively. Remember you don’t want to live off of the principle. The idea is to invest it and live off of the interest.

For example, at an interest rate of 5% a one million dollar investment would generate $50,000 of interest a year. If that would replace the wage that was lost, that tells you that one million dollars worth of life insurance is sufficient for your families needs.