What is the right amount to spend on life insurance?
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Asked January 29, 2016
Everyone has a need for life insurance, no matter who you are. A single person with no family needs to provide for their final expenses, while the family breadwinner needs to provide for their family if unexpected circumstances take them away from their loved ones.
Final expense insurance, sometimes called funeral insurance, is designed to take care of your funeral, interment, and other costs associated with your eventual demise. This is the most affordable type of permanent life insurance, but it is also much more limited than any other life insurance policy. Unlike most types of life insurance, final expense coverage pays out to a funeral home or director. This is the absolute minimum type of life insurance anyone should have.
Buying a policy to protect your family if you pass away requires you to do some calculations. Calculate what your annual earnings are, and multiply that amount by the number of years you want to provide for your loved ones. Add in any other considerations you may have, including inheritances, and special needs of family members. Add a minimum of 5 percent of this amount to the calculated sum, and you have a rough estimate of the total amount of life insurance you should purchase.
There is not a definite amount you should spend on life insurance, and the general rule of thumb is that more is always better than dying without enough coverage. If your personal finances permit, you can also purchase life insurance with the intention of leaving something for a close friend, your pets, or even setting up a trust or contributing to your favorite charity or organization.
Another factor which will affect how much you spend on life insurance is your age and current health when you purchase a policy. If you have medical conditions or are over 45 years old, the cost of insurance will be much higher than if you purchase while you are young and in good health. Since the cost of life insurance increases as you age, purchasing a policy as early in life as possible will always yield a higher return for the cost. Similarly, buying a policy while your health is good will avoid higher rates or policy denial if you develop a medical problem later in life.
Answered February 9, 2016 by Anonymous