How Much Life Insurance Can Fit Into Your Budget?

To truly treat a term life insurance policy as an investment, it's important to choose the correct amount of insurance. Good coverage should stay within a family's budget while providing sufficient benefits.

Unfortunately, many families don't know where to start when deciding benefits and end up underinsured, which leaves beneficiaries scrambling to make ends meet after the policy holder's death.

There are several major points to consider when purchasing coverage, including current income, burial expenses, and other financial obligations that you'd like your insurance policy to cover, including future tuition costs or investments for loved ones. A life insurance policy should ideally cover all of these costs for several years after the policy holder's death.

However, a term life insurance policy should be used as a form of security, not income. Excessive coverage will be expensive and unnecessary. The point of the policy should be to protect beneficiaries, but not to provide a windfall.

For example, if a person makes $50,000 a year and expects burial expenses of around $10,000, about $180,000 of insurance would provide financial protection for about three years for that person's family. To adjust for inflation, it would be a good idea to buy $200,000 of coverage. If the buyer has other investments such as an IRA or 401k, less coverage might be necessary, as those investments will help to pay for beneficiaries' needs after the policy holder's death.

To fit a relatively large term life insurance policy into a household's budget, consider a few different life insurance quotes and different policy types that might be better suited to certain individuals. Level term life insurance policies have unchanging premiums and are the most common type of term life insurance. Convertible policies can be better for younger buyers, as they can be converted to whole life or universal policies after several years of coverage.

The length of the term life insurance policy is also important, as longer policies are both more expensive and more protective. To set the length of your term life insurance policy, consider your other investments and annual costs for the care of children or other potential beneficiaries. When investments have matured or when a household budget has decreased to the point at which a term life insurance policy is no longer necessary, premiums paid into that policy will be wasted.

As an example, consider a male buyer with two young children and a 401k that will mature when the buyer is 65. If the buyer is purchasing his policy at age 45, a 20 year term life policy would probably be the most appropriate choice.

By purchasing a 20 year policy rather than a 30 year policy, the buyer will be able to fit the policy into his budget while still choosing appropriate benefits to pay for several years of his family's expenses. Shorter term life insurance policies wouldn't be as helpful for this buyer, as they would expire before his 401k matured and before his children became self-sufficient. Setting a short term can be just as dangerous as under insuring.

When deciding how much life insurance to buy, you should look at your annual costs and investments. Research different types of life insurance and look for quotes from at least four to six term life insurance companies. Decide on an appropriate term length. Think about inflation to protect your policy's value and how unexpected circumstances such as job loss that might make your policy difficult to afford. Looking at all of your options is the best way to purchase a policy that fits into your household's budget while keeping beneficiaries well protected.