Personal Life Insurance Needs Analysis

Instructor: Elisha Madison

Elisha is a writer, editor, and aspiring novelist. She has a Master's degree in Ancient Celtic History & Mythology and another Masters in Museum Studies.

How do you know if you need life insurance? Do you have family? Significant bills? There are many questions you need to ask yourself before you start the process. This lesson will help you decide what you need.

Introduction to Life Insurance

A life insurance policy is a policy when an insured pays a specific premium for a specified time or lifetime to ensure that they will get a certain pay out if they pass away. This pay out is then paid to family or dependents. Although this subject is a daunting one, as no one wants to discuss the passing of a loved one, thinking ahead can help families pay off bills or even just afford funeral expenses so they are not under too much monetary strain.

Who Needs Life Insurance?

So the question is do you need life insurance? And if you do need life insurance what type? And how much? So many questions you have to ask yourself. Ultimately, the argument can be made that everyone needs life insurance. Perhaps you don't have a family yet, but are you planning on one? If so, starting a policy now, can make you more prepared for when you do marry and have children.

Additionally, if you have just started with a new company, this is the very best time to start your policy. When first starting at a company, many will offer you the chance to sign up for life insurance for 2-4 times your pay without medical review, thus allowing you more life insurance than purchasing an outside policy.

How Much Life Insurance?

Another big question is how much do you need? Well, if purchasing through a company you work for, get the maximum that you can without a medical assessment. The amount taken from your pay is usually minuscule in comparison to what you will get. However, what if you are purchasing an outside policy? Here are some things to keep in mind:

  • Mortgage
  • Student loan debt
  • Funeral expenses
  • Auto loans
  • Credit card debt
  • College tuition for your children

Since life insurance money can be used for anything, it's important to think towards the future. If you pass before your kids have grown, do you want them to have college tuition? Do you want your spouse to be able to pay off the house after you pass so they are not unduly strained? The rule of thumb for life insurance is that you need 7-10 times your pay to successfully provide enough life insurance to your loved ones. So for example, if you make $50,000 a year you would want at least $350,000 as the limit of your policy.

Don't discount funeral expenses, a cremation alone costs an average of $3,000, not taking into account a memorial service that is likely added. A burial plot, headstone, coffin, and service can be $10,000 or more. And these expenses are ones you can't avoid.

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