Money management is a skill that’s seldom taught throughout life. However, it is crucial for us all not only to survive but also to set up our futures and those of our families.
It allows people to keep out of debt, use credit wisely and build a nest egg. Part of knowing how to manage financial matters well is understanding how to protect your assets and making sure all those who count on you financially are also protected. Insurance can help with this.
Many people have access to at least some form of life insurance, either via their work or because they decided to purchase it on their own. If you’re thinking about buying life insurance or considering expanding an existing policy, you’ll want to know how much life insurance you need.
The answer to this question depends on many circumstances, including your age, the number of your dependents and where you live.
Life Insurance Basics
A life insurance policy is a simple matter requiring the purchase of a policy, which can be paid on a yearly or monthly basis. In turn, when that person dies the company agrees to pay out a sum of money to the recipients designated by the policyholder.
Taking out a life insurance policy is done under many different circumstances. Many employers offer employees a policy that pays out a year’s salary as part of their overall benefits package. Or a young married couple may take out a life insurance policy on their own in order to protect any children they have in the event one of them dies before they’ve accumulated enough wealth for the family to get by on just one salary.
Some People Don’t Need It
Life insurance isn’t a necessity for everyone. A young, single person with no dependents, like everyone else, will face certain expenses after they die. Known as final expenses, they include the cost of a funeral and burial.
If they have enough assets to cover these costs, there’s no need to have any life insurance other than the insurance they get through their job. The same is true of people who have enough assets to provide for their kids and a spouse once they die. An older person may no longer have family ties and already have all the money they need to meet their expenses for the rest of their lives. They don’t need to have life insurance.
If You Have Dependents
Many people have others who rely on them in some way or another. A single mum may be the sole source of income for her entire family. Two parents may both work high-paying jobs but have correspondingly high expenses, like an expensive mortgage and payments for childcare and health insurance. Should they die young they’ll need to make sure their dependents have funds on hand.
The same is true of grandparents raising young children and those who have a spouse who doesn’t earn enough money to cover all the bills on their own. Life insurance can fill these gaps. Life insurance payments for at least five years will provide a family with the fiscal cushion they’ll need for all their ongoing expenses.
Figuring Out Expenses
People purchase life insurance to cover potential gaps in their loved ones income(s) after they pass away. Before deciding on the amount of life insurance you should purchase, it’s a good idea to have a rough idea of your personal expenses.
These include specifics such as your food budget, rent or mortgage, and transportation costs. In addition, you should also include other expenses that would need to be covered if a spouse died suddenly. For example, a stay-at-home mum may be the family’s primary caregiver.
Commercial loans can also be insured: some companies offer credit insurance to cover the entire balance of a loan in case of accidental death, thus providing protection for your family and estate.
In general, a million pounds in life insurance wisely invested will generate roughly thirty thousand pounds a year. If one partner already makes the average median salary on their own, buying less insurance is ideal as it can help fill in the gap.
Bear in mind, however, that expenses change over time. A newborn baby needs constant care, whereas a teenager doesn’t have the same care requirements.
For young families, it may make sense to start off purchasing a relatively large life insurance policy that would provide enough money to survive on until the children got older and the surviving parent could go back to work full-time.
Many policies are renewed on a yearly basis. Once the children grow older and their parents have ideally saved up a bit more money, they can think about dropping the policy.