If you have a family or plan to have a family, buy enough life insurance so that when combined with other sources of income, it will replace the income you now generate for them. Additionally, consider having enough to offset any additional expenses they will incur to replace the services you provide. Your family may also need extra money to make changes after you die, for example, they may want to relocate or your spouse may need to go back to school.
Any “hidden income” should also be planned for. Hidden income is income that you receive through your employment but that isn’t part of your gross wages. It includes things like your employer’s subsidy or your health insurance premium, the matching contribution to your 401(k) plan, and any other perks both large and small. This is an often-overlooked insurance need but can be significant.
If you want to create an inheritance or make a charitable contribution, buy enough life insurance to achieve those goals.
Of course, you should also plan for expenses that arise at death. These include the funeral costs, taxes and administrative costs associated with winding up an estate and passing property to heirs. At a minimum, plan for $15,000.
Keep in mind that premiums are lowest when you are young and increase upon renewal as you age. Some term insurance policies can be renewed when the policy ends, but the premium will generally increase. Some policies require a medical examination at renewal to qualify for the lowest rates.
The death benefit is collateral for the loan, and if you die before it’s repaid, the insurance company collects what is due to the company before determining what’s goes to your beneficiary.
Keep in mind that premiums for permanent policies are generally higher than for term insurance. However, the premium in a permanent policy remains the same no matter how old you are, while term can go up substantially every time you renew it.