Life insurance coverage buys peace of mind for you and financial security for those who you love after you pass away. You can pay premiums for life insurance coverage out of your superannuation fund, which means you can buy a policy without affecting your day-to-day budget.
The cover you buy can ensure that those you care about can maintain their quality of life and continue to move forward with accomplishing their important goals even if you pass away. While buying life insurance is a smart financial choice for virtually everyone, it can be difficult to determine how large of a policy you require and how much coverage you need. You do not want to buy too little life insurance and leave yourself or loved ones unprotected.
What types of life insurance coverage do I need?
Term life insurance will pay a death benefit if you pass away while the policy term remains in effect. However, you also need to have other insurance coverage in case you become sick or disabled but do not actually lose your life as a result of your medical condition.
In addition to a basic term policy that pays a death benefit to beneficiaries, you also will need to purchase some additional types of coverage including income protection insurance, trauma insurance, and total permanent disability insurance.
How much term life insurance coverage is enough?
The basic rule of thumb for determining how much term life insurance you need is to add up all of your current and future financial obligations or the things that you want to use your money to do. For example, you may have a home mortgage with your spouse and you may have a plan to send your children to college. You can add up the cost of repaying your mortgage and paying for college expenses because these are financial obligations that you have taken on.
Once you know how much money you need, think about the existing resources that you have. You may have savings, investments, life insurance in your superannuation fund, survivors earnings, and other income and assets. You can subtract this amount from the total amount of money you need to meet your financial obligations.
The difference between the things you need your money for and the money you have is going to be equal to the amount of life insurance coverage you need.
What are some costs to factor in when deciding how much term life insurance coverage is enough?
Some of the different costs to consider include your mortgage; motor vehicle loans; credit card debt; investment loans; other loans; your gross salary; expected costs of funeral expenses; the number of years of your income you would like to replace for your loved ones; and the costs of your children’s education. When purchasing term life insurance that also covers trauma and disability, you should factor in how much it would cost to retrofit your home for handicap accessibility.
What are some considerations when calculating how much term life insurance to buy.
When you buy term life insurance, you need to think about how your death will affect your family. You may be providing important service to those you love, like taking care of your children. If you pass away, you will be unable to provide this care and your spouse may need to pay someone to do it. You want to ensure that you have left enough money behind through your death benefit to pay for everything that your family needs if you suffer an untimely death.
How much life insurance coverage do you need if you are not working?
If you are not currently earning income, you may still require a life insurance policy. You should think about the value of the services that you are providing to people who you love and care for. This could be things like keeping house, cooking, caring for children, driving children or elderly parents to the doctor, or babysitting for nieces and nephews. When you can no longer do the things that you used to, you want to ensure there is enough money to pay someone to provide for essential services that your loved ones need.
Are there factors that may necessitate the purchase of a larger life insurance policy?
There are some circumstances in which you will need to ensure you buy a larger life insurance policy than most people would purchase. If you have a special needs child, for example, you cannot count on your child becoming self-supporting. You need to ensure that you have left behind enough money to care for your child after you are gone. A large life insurance policy means a big death benefit will provide the necessary income so your child can get the necessary help to live as full a life as possible when you are no longer there to provide care.
How much life insurance do you need if you do not have a spouse or children?
If you do not have a spouse or a child yet but you plan to in the future, you should factor in these future loved ones when you determine how much life insurance cover you require. You will pay less in premiums if you buy a policy when you are young and you can keep overall insurance costs lower even as you age, find a spouse, and start a family. Life insurance is about taking care of your future, so it makes sense to think about the future you plan to have when you buy your policy.
Even if you have no plans to have a spouse or children, it is still important to have life insurance coverage if anyone is depending upon you for income or services. This may be elderly parents, siblings, or even business partners who are dependent upon you and who will face losses when you pass away. With a life insurance policy that provides sufficient coverage, you can make sure everyone is taken care of and that you leave a positive legacy behind.
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