Life insurance is a product designed to replace lost income in the event of a premature death. Policies come in a variety of different types and prices and can be complex financial decision, and one that should not be chosen hastily.
Life insurance is primarily essential when one or more loved ones are dependant upon your income or when your death would cause a financial burden on family or friends handling your final disposition. The death benefit purchased should be sufficient enough to replace that income to your family or loved one for a period of years, plus offset the costs of final expenses. Final expense costs may include, but are not limited to: burial and funeral, unpaid final medical expenses, replacement of income of the loved one who needs to take time off to handle your final affairs, accounting and legal fees of handling the estate and possible probate, and estate taxes.
Let’s face it, if you had a machine at the front door of your house and every January 1st you pulled a lever and out came your annual salary you would insure it pretty heavily wouldn’t you?
The best way to determine the amount you should purchase is to determine your needs first. Income replacement can usually be determined by calculating how much captial it would take to replace your income for approximately 25-30 years at a conservative rate of return. Most agents figure this out to be about 10-12 times your annual gross salary. Basic burial expenses including the above mentioned ancillary costs could be substantial, which is why a professional should be consulted, but most set that amount now at 50-75k. Also keep in mind the factors of inflation and unknown future costs that could not be determined at time of purchase.