According to a report by Forbes, most people are aware of the need for life insurance, but many procrastinate until there is an important life event that pushes them to buy it. Moreover, when one is thinking to buy a life insurance, the question of “how much insurance coverage I need?” will often pop up.
Indeed, it is not an easy question to answer as everyone has different needs and requirements. It will also depend on variables such as your age, your dependent, your liabilities, and budget.
To illustrate, imagine that you are the family’s sole breadwinner who earns $50,000 annually, which is just enough to cover your bills and other expenses such as a childcare fee. Assuming you have $500,000 life insurance coverage, that could be invested and yield 5% annually, the principal amount could only give your family around $25,000 a year in case the unfortunate happens to you. This coverage is therefore not sustainable for your family.
In the above scenario, should the family breadwinner passed away, the family that is left behind will not be able to maintain their lifestyle as they will only receive $25,000 annually, which is half of the $50,000 that the breadwinner used to generate annually when he was alive. Having the family stay in the current family home and the children go to the same school would require a stronger financing, meaning that the breadwinner will have to increase the life insurance coverage.
For someone earning $50,000/year, assuming that it could be invested and yield 5% annually, the 'safe' amount of life insurance protection he or she needs to help sustain his or her family's expenses is estimated at $1 million. The principal amount alone will provide a comfortable buffer of $50,000 per year for the family.
All in all, different individuals may buy a life insurance policy for different reasons, depending on their needs. It might be to cover children’s expenses, to pay final expenses, to replace a potential loss of income, to pay off debts, to buy a business partner’s shares, or even to pay off outstanding taxes. So, it all boils down to your specific need.
Nonetheless, we must always be prudent and aim for a good financial management. One should not utilize a life insurance proceed for a house purchase, a loan repayment or other big expenses. Furthermore, seeking advice from a professional and experienced financial advisor before making the decision to buy a life insurance is crucial. This can help you to be assured that you are buying the right life insurance policy to protect your family.
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