How Much Life Insurance Should You Get?

The realization of mortality affects people in different ways. Life events such as marriage, having children, and taking on large debts have a big impact on how people feel about what they are leaving behind. Many people have some level of concern about how they will be remembered. Will you leave behind burdens, debts, inheritance, or memories?

Regardless of what you intend to leave behind or who you intend to impact, the decision of how much life insurance to purchase is a personal one. The impact you want to create will be influenced largely by the means you have to put the plan in place. Different kinds of life insurance can make purchasing a higher death benefit more plausible. For the purpose of this article, we will strictly be talking about how to decide on an amount. The type of life insurance used to achieve the goal is another matter.

There are many ways to think about the amount of money you want to have left behind. It is best to plan for income replacement rather than think about one lump sum payment. Aside from the pain of losing an important family member, the family will struggle based on the fact that the household income will be lowered.

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Two Paths to Replacing Your Income

All of your income will not need to be replaced. What you need to have replaced can change significantly depending on how many surviving dependents you have in the household. If you have children that are older in age, you can plan to have your income replaced for a short time until they are out of the house. If this is the case, decide on a number and multiply that by the amount of years income will be required. Simple.

The second strategy is for when you are planning to provide income for a longer period of time. With this mindset, you should be thinking about what kind of money you need to put into a vehicle that will provide a reliable yield. For example, if you would like to provide an ongoing income of $30,000, you can plan to have $500,000 in your death benefit earmarked to go towards a financial vehicle providing a reliable six percent yield annually.

It’s Not That Simple

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Income replacement will account for a large portion of what you plan to leave behind. Still, you also need to take final expenses, remaining debts, and education funding into account to get your final number. The most important part of the process is having an open and honest conversation with your significant others. You are preparing to leave something for them, so they deserve to have some say in what they need and don’t need. This is not an easy process. There will likely be some desires left unaccounted for. The important part is taking care of the vital matters and ensuring you have a plan in place.

No matter how you determine the amount of life insurance that is right for you, a connection should be made with a reliable planner to guide survivors through the process. Implementation can be complex and your beneficiaries might not be interested in dealing with it. This is understandable at an emotional time for them. With guidance from a seasoned professional that understands your intentions, you can ensure that the people you care about are taken care of.

Life Insurance on a Child

When looking for growth in savings, it is wise to plan around market-based vehicles. Although, assuming this is the best strategy in all situations is an over-simplification. Different goals call for a diverse range of strategies. For example, saving for children can look very different than planning for retirement. For one, you have to prepare for the inevitability that these children are eventually going to control whatever vehicles you are creating. Will you be setting them up to utilize the asset in the best way once it is no longer under your control?

The Traditional Route

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The traditional 529 plan is a nice market-based vehicle, but it is penalized if funds are withdrawn for anything other than educational usage. There is some flexibility in the definition to include things other than tuition at a university. Still, the boundaries might not stretch far enough to include the eventual desired usage of your child. Creating saving through life insurance can be an effective way to build savings for your child while still allowing for complete autonomy in the way it is used.

Doubters Galore

The idea of putting life insurance on an infant is one that could be met with understandable suspicion. Many advisors will caution against such a strategy and argue for more efficient ways to put your money to work. They have a point. Growth in the cash value of a life insurance policy will not be able to compare to what can be achieved through stock investments. At best, cash value of a life insurance policy should be seen as a conservative strategy that performs better over time than traditional bank accounts and certificates of deposit.

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If this strategy is implemented correctly and early enough,
the results can be powerful. Through a permanent life insurance vehicle, the
cash value will be growing throughout the child’s adolescence to create an
available bank of money that can be used at any time for any purpose. If this
is specifically done with a policy that has non-direct recognition, it can be
used for infinite banking, which can create a lifetime of value for the child by
providing a personal bank for loans as opposed to going to a commercial bank.

Better still, the account would be poised to make even more significant increases if the child were educated to make the right decisions moving forward. This means that the leverage they could gain through this account in their twenties would grow exponentially into their 30’s, 40’s, and beyond. This puts them in a position to hand down an even more powerful legacy to the generation that follows them. Thus, this asset is not only something that creates incredible opportunities within one lifetime, but could be leveraged to create opportunities for future generations as well. A properly organized policy has a chance to build a legacy.

This is not to say that a life insurance policy is the best strategy for saving for your child. That would be just as much of an oversimplification as saying market-based vehicles are always the best strategy for growth. There is much to consider when thinking about the goals for saving for your child. The lesson to be learned when considering this kind of policy is this: don’t limit your options.

The Advantage of Term Insurance

It is difficult to fault anybody for wanting to leave a
legacy for their family once they pass on. For this reason, opting for
permanent insurance over the inexpensive alternative of term insurance is
understandable. As long as you pay your premiums, you know what your family
will be left with regardless of when, where, how, or why they will be left
without you.

Term insurance doesn’t come with those same guarantees. In
the majority of cases, premiums will be paid for the initial period and then
will be allowed to lapse once expenses start to raise. This is why most term
insurance policies don’t pay out and one of the reasons insurance is such a
profitable business. If your main focus is having a payout at the end, term
insurance is not the answer for you but there is a way you can implement it.

The Way to Use Term Insurance

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Opting for term insurance over permanent insurance does make
sense for people in the right frame of mind. For example, if you are less
worried about leaving something behind at your death and more concerned about
supporting your children until they reach an age of independence, term
insurance can be a perfect solution. You can set a term for the insurance to be
in place until your children reach an age to care for themselves and the allow
the policy to lapse.

If your child is three and you want to make sure that you
can provide for them through their years in college whether you are around or
not, a 20-year term policy will be the most cost effective way to make sure
that happens. With the money you save by using term instead of permanent, you
can invest where you will get a greater return. While a permanent policy will have
growth in its cash value through dividends and premium contributions, it cannot
be expected to generate the kind of returns a proper investment vehicle could.

The Difference in Growth

With an online policy quote generator, we put in the information
for a healthy 30-year-old male and searched for a policy providing $500,000 of
coverage. The generator provided quotes for term policies from a number of
companies that had monthly premiums ranging from $20 to $35. The same generator
provided with the same information gave quotes with a monthly premium above
$400 for a permanent policy.

By taking the term policy and investing the remaining $365
each month over the course of those 20 years, if that account experienced seven
percent compounding growth, it would grow to $191,612.37. At that point, even
if you were to stop contributions to this account and continue to let it grow
for 20 more years, it would grow above $700,000. With more contribution or a
better return, this could easily grow over $1,000,000 in that time.

Splitting the Difference

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If you still have interest in having permanent insurance to
ensure you leave something behind and have a bucket of safe money growing, you
could split your insurance need between the two different kinds of life
insurance. If you needed $500,000, you could get $150,000 in permanent
insurance and $350,000 in term. The total premium would still be significantly
lower than if you got only permanent insurance.

Both permanent insurance and term have their advantages and
the decision comes down to preferences and need. When you consider how much and
what kind of insurance you need, you should consider multiple factors. Think
about your income, who it supports, and how much of that income you would want
to have replaced for those individuals if something were to happen to you.
Also, decide how long they would need that income for. Does it need to continue
for the rest of their lives? Talk to these individuals so you can begin to get
a clear picture of what the need would be. Then, you can begin thinking about
how to fill that need.