Picking your coverage<\/strong><\/h2>\nPick a coverage amount that’s equal to your annual salary multiplied by your term. So for example, if you make $100,000 a year and have 10 years left until retirement, pick a coverage amount of $1M. If you have 20 years left until retirement, pick a coverage of $100,000 x 20 = $2M.<\/p>\n
It may sound like magic, but the multiple is an annuity factor that takes into account average expected future salary inflation and investment returns. Calculating your coverage this way should enable your beneficiaries to invest the life insurance payout (for example, in a mutual fund) and maintain their standard of living by recouping your lost income each year through investment returns. Of course that all depends on market conditions-mutual fund investing is subject to market risk, including possible loss of principal.<\/p>\n
To make things even simpler, many financial experts recommend coverage of approximately 7-10 times your annual salary. So if you don’t have the bandwidth right now, simply get your 10x in place, and figure out the rest later. Ladder’s flexible coverage allows you to automatically decrease and apply to increase your coverage with a few taps in the app or clicks of the mouse.<\/p>\n
If you’d rather think through your goals in more detail, here are 3 steps to follow:<\/p>\n
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Start by clarifying your goals<\/h3>\n
Why do you want to buy life insurance? Or asked another way, what are you worried will happen (or not happen) if you were to die in the next 10, 20 or 30 years?<\/p>\n
Write down your answers, and for each of them figure out if money would help mitigate your concern. If so, there’s your life insurance goal. Here’s a list of goals we commonly hear:<\/p>\n
I want my family to…<\/p>\n
\n- Keep the house\/buy a house<\/li>\n
- Pay-off my debts<\/li>\n
- Afford daily expenses (groceries, health care, child care, housing, utilities, transportation)<\/li>\n
- Afford traveling and hobbies<\/li>\n
- Have a rainy day fund<\/li>\n
- Afford higher education<\/li>\n
- Have money for retirement<\/li>\n
- Pay for my funeral<\/li>\n<\/ul>\n
These life insurance goals look a lot like general financial goals for you and your family. That makes sense, because the purpose of life insurance is to replace economic value – in other words, you want your family’s financial picture to stay the same, regardless of what happens to you.<\/p>\n
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Put some numbers to it<\/h3>\n
Now that you’ve outlined your goals, figure out how much money will be needed to get your family there. For example, how big is your mortgage balance? Or how much money do you think your kids will need to go to college, or for your spouse to retire?<\/p>\n
Finding your term: To figure out your life insurance term, or how long you should be covered for, take the longest time horizon from your list outlined above.<\/p>\n
Calculating your coverage amount: To figure out your coverage amount, or the size of the payout you’d want to leave behind, add up the total amount of money that will be needed over your term. Now subtract any savings you already have. Those go towards all the goals you’ve outlined above. Round things up (depending on what coverage level increments are offered by the life insurance company you choose) and you’ll find what amount of coverage and what term length is right for you.<\/p>\n
Now’s a good time for a gut check – does that feel like enough? While the math matters most, your intuition has a role to play in putting your mind at ease. If you’d rather go with the expert gut check discussed earlier, look at this number as a multiple of your income. The ballpark method recommends a minimum multiple of 7 to 10 times your salary, and a term equal to the years you have left until retirement.<\/p>\n
Don’t worry about getting it all perfect right out the gate. Get something in place that works for your goals as best you can figure out and as soon as possible, and then adapt it over time.<\/p>\n
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Work out what you can afford<\/h3>\n
You have the budget and want to cover 100% of the risk: If the quote fits in your budget, that’s great. Don’t cut corners if you don’t have to, and enjoy some sound sleep knowing you have everything covered.<\/p>\n
You need to trim your budget and afford more risk: If money is tight, here are ways that can help make things fit a little better:<\/p>\n
\n- Look into social security payouts – in some instances, the federal government pays death benefits to certain members of your family – and deduct those from your total coverage amount.<\/li>\n<\/ul>\n
\n- If your spouse or partner brings in income, make sure you take that into account and only calculate how much extra money (your share) will be needed for achieving your goals.<\/li>\n<\/ul>\n
\n- If you need to, go back to your goals – what’s the most important thing you want to make sure happens? – and trim your coverage accordingly.<\/li>\n<\/ul>\n
\n- Alternatively, you may decide to max out your coverage but reduce your term to the years you feel are most critical for your family to get through, for example, when your children are young.<\/li>\n<\/ul>\n
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