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It’s something you shouldn’t gloss over.
If you’re in the process of shopping around for life insurance, good for you. Without life insurance, you might end up leaving your loved ones in a financial lurch in the event of your passing.
But simply buying life insurance isn’t enough. You’ll also need to make sure you have the right amount of coverage so your loved ones truly don’t have to worry about money in your absence.
Now, you’ll often hear that your life insurance payout should be enough to replace your salary for 10 years. Some people will even tell you to buy enough coverage to replace 20 or 25 years of your income.
The more income you’re replacing, the more expensive your life insurance policy is apt to be, so you don’t simply want to tell yourself “more is better.” Instead, you’ll need to strike a good balance between adequate coverage and affordable premiums.
But it’s not just your salary you should be accounting for in the course of buying life insurance. There’s another big expense you’ll want your insurance policy’s benefit to cover.
Don’t forget your mortgage
Financial guru Suze Orman is a firm believer in buying life insurance. But in a recent podcast episodeshe cautioned those in the process of shopping for life insurance to keep one key expense in mind — their mortgages.
If you own a home jointly with a spouse, and your spouse doesn’t work, they may not be in a position to keep up with those mortgage payments in your absence — even if you leave behind a nice amount of insurance money. That’s because your spouse might need that money to cover other expenses, like utility billsfood, and medications for themselves and your kids.
Even if your spouse does work, if you signed your mortgage as a dual-income family, you may be able to cover your monthly payments with relative ease due to having two paychecks. But if your income goes away, your spouse may not be able to cover the mortgage on their own — even with insurance money factored into the mix.
That’s why it’s a good idea to make sure your life insurance payout can not only replace many years of your income, but also, pay off any joint debts you and your spouse hold. And so if you have a mortgage, that’s one debt you’ll want to address.
Get that number right
A lingering mortgage can be a huge burden at a time when your family experiences a major emotional and financial loss. So it’s important to make sure your insurance payout accounts for that debt.
Let’s say you earn $80,000 a year and want to leave your loved ones with a life insurance benefit equal to 10 times your salary. If you also owe $200,000 on your home, don’t just go with an $800,000 death benefit. Instead, aim for $1 million if you can afford the premiums. You’ll be doing a really good thing for your loved ones as they cope with a host of difficult changes.
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