Buying a life insurance policy is different than purchasing any other type of insurance policy. Home insurance is pretty straightforward. What amount of coverage does it take to replace the home if it experiences a total loss? Car insurance is not much different. What kind of car, truck or SUV do you drive and what kind of protection do you need to protect you financially if you’re at fault?
Life insurance is more open. Before we begin to work through what type of policy you need, we start with three questions.
- What do you want the money to do
- How much will it take to do that
- What can your budget handle
We ask everyone these questions, whether they are single, married (or significant other), kids or no kids, in your 20’s or 50’s. Simply put, if you can’t answer these questions, then we’re only guessing at what the right policy is for you.
What do you want the money to do? People buy life insurance for many reasons;
- To provide for a surviving spouse (& kids)
- College education for the kids
- Pay off a home, cars, debts, etc.
- Establish a nest egg
Everyone has an idea of what they want it to do, but whatever “it” is, needs to be determined first.
How much will it take to do that? Once you know what you want the money to do, then it’s time to outline how much you need to accomplish that.
- How much is the outstanding balance on your home (anticipated balance if you’ve not purchased a home yet)
- Outstanding balances on credit cards, education debt, car loans
- How much money would it cost to provide for your family if you’re income went away
- If you have young children, cost of a nanny, daycare, public vs. private school, sports, etc.
- Does the surviving spouse have his/her own income
- If there’s a short fall, what is it, and how many months / years do you think need to be covered
- College education for your child or children in today’s dollars is $15,100 for public schools and $32,900 for private institutions (on average). If we look at 2030, the average cost for a year of tuition (not including books, fees, housing, etc.) at a public school is $44,047 or $205,000 for private.
List and total everything up and that will provide you with the answer to how much insurance fits the total goal. Now comes the balancing part.
What can your budget handle? “How much” is a real and legitimate question. As a colleague once shared with me, “If the choice is between paying cable or life insurance, life insurance usually loses.” We all live with a budgetary reality. What will shape this are a number of factors;
- Do you have a budget
- What are your current expenses vs. income
- Type of insurance (permanent vs. term)
- The amount of insurance
- Your medical state today along with your history
- Are your goals ideals that need to be tempered with budgetary reality
- How long we need the insurance to be in place
- What investments do you have in place
- How much debt are you carrying, what is it & when will it be paid off
These are the questions I advise everyone to examine. If you have these answered, then everything else falls into place more easily. Have a comment or question? Post it in the comments section below or on our Facebook page or direct message me on Twitter @wiseinsgroup.