How much coverage do you need?
There is no simple answer to how much coverage is enough.
Some financial planners say you need enough insurance to replace five to seven years of your salary. If you have young children or significant debt, you should bump up your coverage so you have enough to replace as much as 10 years of your salary, they say. That would mean a person making $50,000 a year should have anywhere from $250,000 to $500,000 worth of coverage or more.
Remember, the sole purpose of life insurance is to replace your income in case you die, so that your dependents can maintain their current lifestyle.
Factors to consider include whether the surviving partner will have child care expenses if one partner is out of the picture. Do you have other assets on which to draw? Will your children be out of the nest soon? These, and many other factors, influence the decision on how much coverage you need.
Buying a whole-life policy doesn't necessarily mean you are fully insured. Because of the investment component of whole life, the policies are much more expensive than term. Don't simply buy less coverage, as it defeats the purpose of buying insurance in the first place: to cover dependents.
Next, you've got to figure out how long you need the policy.
1. All policies fall into one of two camps.
There are term policies, or pure insurance coverage. And there are the many variants of whole life, which combine an investment product with pure term insurance and build cash value.
2. Insurance is sold, not bought.
Agents sell the vast majority of life policies written in the U.S. because the life insurance industry has a vested interest in pushing high-commission (and high-profit) whole-life policies.
3. Whole life is expensive.
Policies with an investment component cost many times more than term policies. As a result, many people who buy whole life often can't afford an adequate face value, leaving themselves under-insured.
4. Whole-life policies are built on assumptions.
The returns quoted by the agent are simply guesses – not reality. And some companies keep these guesses of future returns on the high side to attract more buyers.
5. Keep your investing and insurance strictly separate.
There are better places to invest – and without the high commissions of whole-life policies.
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