The Right Amount of Life Insurance

Proper Coverage is Important When it Comes to Protecting Family

Sep 24, 2009 Christopher Pascale

When buying life insurance, a key factor is determining how much coverage a person's dependents will need to cover his lost income, debt, and future obligations.

Many men and women today are conscious of the legacy they will leave behind. While some are sports stars, talented artists, and business tycoons, the average person can still leave a mark by making sure that his or her family is well taken care of in the wake of an untimely passing.

Where financial success is not overwhelming, life insurance can make up for many differences. When people buy life insurance the following should be considered:

Who depends on them financially
How much income do they earn
What debts will be left behind
What future obligations do they hold

A Person With no Dependents Usually Needs no Life Insurance

Following the criteria above, single people with no obligations, whether they are eight years old or eighty, do not need life insurance. A small policy could be purchased to cover the cost of a funeral where no savings is available, but, for the most part, no policy is needed.

On the other hand, if a person with no dependents is carrying a large amount of debt, then a life insurance policy would be ideal so as not to leave it hanging over the head of another relative. Debts include mortgages, school loans, car loans, and credit cards.

Life Insurance is a Necessity for Those With Debt

On the opposite side of a person with no children and no debt is the average family in the United States. The average household today is carrying approximately $8,000 in credit card debt, a $70,000 mortgage balance, and $20,000 in student loans for each college graduate.

When added together, a couple that both borrowed to go to college owes $118,000. For people living near New York City, Washington, DC, and similar areas, such mortgages are rare, and insurance should be purchased according to the needs of each person.

If a couple has the above $118,000 in debt, then insurance to cover it would be a wise minimum to consider.

Life Insurance to Cover Future Obligations

The average household with $118,000 also contains two parents and a child. If the main breadwinner of this household was to pass away unexpectedly when the child was 12 years old, then several factors would have to be considered beyond the debt:

Providing equal income for a set number of years
Sufficient money for the child's education
Money for spouse's education

If the head of household in this case earned $45,000 a year, then he would want to provide that income for a minimum of at least six years (time until minor is an adult). Added to that is the child's money for further education if possible.

Whether the plan is to provide for the child (and/or spouse) to go to trade school, community college, or Harvard, the money needs to be added into the insurance policy if it does not exist elsewhere.

Debts and obligations will look like this if money is provided for both spouse and child to further their education:

$118,000 (debt)
$270,000 (six years income)
$50,000 (child's attendance to four year public college)
$80,000 (spouse's attendance to graduate school)

The total life insurance to consider in this situation of a family of three with the average US household debt would start at $518,000.

Given that every household has different financial situations, buying life insurance is a purely subjective matter. People looking into policies should carefully consider how much money they earn and how long their dependents will need it to continue to come in. Along with this, the income will extend much farther if all debts are covered. And then, people should consider what kind of future they want to give those they are leaving behind.

Sources

Beattie, Andrew. "How Much Life Insurance Should you Carry?". Investopedia.com.

Khan, Kim. "How does Your Debt Compare?". msn.com.

US Census Fact Sheet. census.gov.

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