Get a Handle on How Much Life Insurance You Need

In the event of a breadwinner's untimely death, a life insurance policy in Illinois is often all that stands between continued prosperity and security for surviving family members and severe financial hardship. For most working Americans, a life insurance policy is the promise of a lifetime of earnings and financial support, even if the insured is no longer there to see it.

For working Americans supporting a family, many experts recommend a figure between 10 and 20 times your current annual income. If you are younger you will probably want to be near the upper end of that range. You may need less coverage as you get older, since the life insurance policy needs to replace fewer years of future salaries as you get closer to retirement, and children grow up.

Another method suggests choosing a reasonable and conservative interest rate and dividing that interest rate into a lump sum to generate the desired annual income. Many experts use the going rate on home mortgages as a useful proxy to estimate the discount rate, since that is generally an attainable rate that can be achieved with reasonable prudence on the part of an investor.

If the assumed reasonable interest rate is 6 percent, then that will generate an income of $60,000 per year for every $1 million in death benefit without taking inordinate risk to principal. Is that enough money? That depends on your personal family situation and goals. If you have a lot of savings, or if you don't earn that much, or if your home is nearly paid off, you may need less. If children are very young and you need to worry about inflation over the next 18-20 years, you may need more.

Some people choose to have a death benefit sufficient to pay off the mortgage, pay for anticipated educational expenses for surviving family members, pay off any outstanding debts, pay for any funeral costs. $15,000 to $20,000 is a reasonable estimate for typical funeral and burial costs in many cases. In addition, some people want to build in enough extra to allow a surviving parent to take six months or a year off work to be with children.

Have family members with special needs or medical issues? You'll probably want to add about $100,000 to $250,000 in death benefit to the final amount.

Consider Future Insurability

As your earnings increase, you can add to your life insurance, as long as you can medically qualify. You may consider purchasing a 'guaranteed insurability rider.' This is a contractual guarantee that you may purchase additional insurance at specific future dates, regardless of your medical status at that time. For example, if your health situation changes, a guaranteed insurability rider means you will still be able to purchase additional insurance to protect your family at specific ages, or if you should have a child or get married. The insurance company cannot turn you down.

Don't Delay

The best, as they say, is the mortal enemy of the good. If taking out $1 million or more in life insurance seems tough now, you don't have to wait until you can afford the ideal life insurance plan. It's usually best to buy as much as you can easily afford right away, while you are in good health and while rates are likely the lowest they'll ever be in your lifetime.


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