02/02/2022
How Much Insurance Do You Really Need?
Before buying insurance, try to figure out how much you need. How much insurance you need depends on a variety of factors, including the type of insurance youíre looking at getting, the laws, and your family financial situation. In general, the idea behind insurance is to avoid added financial stress when a difficult situation occurs, not shower someone in riches.
By Law
Each state has various requirements on auto insurance, so you need to ensure that whatever insurance you get for your automobile covers what is required by law. Most states have quite low requirements so you may then want to also decide to get a little extra based on your needs and your own level of risk aversion.
Income Needs
If your family needs income after your death, you may want to consider various types of insurance that can offer an income to your beneficiaries. Your insurance agent can help you determine what type of insurance is best for your needs, but the first thing you should do is make a list of your assets, debts, and how much income your family will need if youíre not there. Age plays a big factor here, too. If you spouse is closer to the age they can collect social security, the income you need to provide them after your death will be substantially lower.
How Much Debt You Have
Some debt will disappear with your death automatically. Other debt, such as joint debt, medical bills or your house payment will not go away. When you factor in that, and the loss of your income, plus paying off the debt that youíve accumulated, youíll have a much better idea of how much life insurance you need. The same thing can be done for other types of insurance, such as homeowner's or renterís insurance. Itís based on how much you need to pay off or replace.
Your Level of Risk Aversion
Some people have a higher tolerance for risk than others. If you have a large cash savings account, itís important to consider how much of that you want to risk, compared to the cost of buying enough insurance to pay down debt, pay final expenses, or pay to fix your car in an accident. With auto insurance, the higher your deductible the lower your monthly premium payment, so if you have good cash reserves you might be willing to risk some of your savings to pay less each month.
How Much Pension You Have
If you have a pension account, consider that in your insurance dealings because itís money that your family may have available in addition to your savings and insurance. Generally the more cash your family will have at your death, the less insurance you need to purchase. However, what if you were incapacitated instead of dead? Do you have insurance to cover that contingency?
Your Legacy
While insurance should not be something you buy to create wealth in your family due to the expensive nature of insurance as you age, sometimes you just want to provide a legacy to someone such as a charity or a grandchild. You can get a special policy that goes directly to them after your death just to pass on something from you, even if you have nothing in the way of personal assets now.
Deciding how much insurance you really need depends on the type of insurance youíre getting, your current cash savings amount, and how close you are to retirement. In addition, consider your risk tolerance level, and the needs of the people you love and care about.
