Income replacement is one of the biggest things to consider when determining the amount of coverage needed in a life insurance policy. Financial professionals offer several different formulas to calculate income replacement. One of the simplest formulas takes your annual income and subtracts your personal expenses. For example, let’s say you bring home $50,000 per year. Some of that money will be spent on your personal needs (not family needs). If you are no longer alive, then you are no longer spending money on personal needs. That’s why personal expenses are subtracted from annual income. A common assumption is that 25% of your annual income is devoted to personal expenses. Financial professionals recommend a minimum of 5 years income replacement.
There are some decent life insurance calculators available, but one assumption they all make is that your income is the only income that needs replacement. Grieving affects many things, including job performance. Some surviving spouses may require a long time to grieve, so their job performance may be affected long term. Grief may even cause someone to lose a job. I don’t claim to know the statistics on grieving and job performance, but one thing makes intuitive sense: jobs that require a great deal of creativity are most affected by grieving. On the other hand, jobs that require repetitive manual labor are probably the least affected.
Job performance may also be affected if the surviving spouse has young children. Time may be needed away from work in order for a parent to provide emotional support for grieving children. In conclusion, it’s good to consider the income of both spouses for life insurance coverage even though only one spouse is being insured with the policy. If you have any questions, don’t hesitate to send me a message.
Perhaps the biggest reason people hesitate to buy life insurance is the fear of it being too expensive. It doesn’t help that most websites providing instant quotes default to $10,000 of coverage. How did $10,000 become the default amount to quote? That amount of money is excessive for the growing number of people choosing cremation over traditional burial. By using $10,000 as a default, people might assume that’s the minimum amount that can be purchased, and they might be using that to determine if life insurance is affordable. Fortunately, much lower amounts of coverage can be purchased.
Every life insurance company sets a minimum amount of coverage, but all companies that I’ve seen do at least $5,000 for a minimum. Many will go down to $3,000. The lowest I’ve seen is $1,500. These minimums can be helpful for those on a very restricted budget (low income) who are planning for a cremation. A cremation with ceremony shouldn’t run more than $5,000. People who don’t want a ceremony can get away with lower amounts of coverage. Here is a quoting tool where you can put in $2,500 for a minimum. Finding coverage amounts this low is only half the battle because you also have to find agents willing to write policies that small. You don’t have to worry about that with Houston Life Insurance Plans. We will write any amount of coverage, no matter how small.
Purchasing the right amount of coverage has always been a source of anxiety for potential buyers of life insurance. Not buying enough coverage isn’t the end of the world. You can buy a separate policy to make up the deficit. The new policy will be subject to underwriting, so if your health deteriorated since the last policy, you might have to pay more. The new policy will be rated on your current age, so if you’ve had a birthday since your last policy, the rates are likely to be higher because of it. Also, almost every policy has an annual policy fee built into the monthly premium. If you have multiple policies, you will likely pay multiple policy fees. Policy fees for small whole life policies will run about $40 for the year.
Consumers try really hard to only buy what they need. Its good to only buy what you need for groceries because excess groceries go to waste. Life insurance, on the other hand, never goes to waste no matter how much is purchased. Even if a life policy is only meant to cover funeral expenses, any amount of coverage above that cost can be used by the beneficiary for other needs. Technically, the beneficiary doesn’t have to spend the insurance proceeds on a funeral; the money can be spent on anything the beneficiary desires. Its also good to error on the side of getting more than enough coverage because of inflation. People ask me all the time how much coverage they need for a cremation. I’m careful to only give rough estimates because one funeral home can have very different prices than another funeral home. $5,000 of coverage should cover a cremation and ceremony. Or you can get half the coverage if no ceremony is needed. Use this quoting tool to see what different amounts of coverage cost.