Figuring out Your Necessary Term Insurance

Term insurance is temporary life insurance. It is commonly purchased by people who are on a tight budget. Many term plans can be converted into permanent life insurance plans if necessary. Others are intentionally purchased on a temporary basis, such as when children are young and needier. There are four basic factors that will guide you in choosing term insurance limits: loan debt, other debt, income replacement and family needs.

Loan Debt

The most important debt you will need to pay off is your mortgage, rent or senior loans such as student and business loans. This debt will become a burden to your benefactors if you do not have insurance or assets to cover it. Instead of inheriting money from you to cover the costs, they will have to repay the debt after your death. Even if you rent, you should plan on leaving behind enough to cover a few months while your family moves your belongings out of your home. Count the sum you owe in senior debts, rent and other fixed payments as the first factor in your necessary term insurance.

Other Debt Payments

You should next consider other debts, like credit cards or utility bills or any debt that you may need to cover in the case of your death. These bills will again be transferred to the benefactor of your estate if you are not able to pay them in your lifetime. You may not be obligated to make these payments in full, however. You can ask your accountant or attorney how much of the debt would have to be paid in a settlement. There is no certain answer, and it would require negotiation to settle the debt. However, if you have tens of thousands of dollars in other debts, you may not need to insure the full amount.

Income Replacement

If you are purchasing term insurance before your retirement, you should consider how much it would take to replace your income in your home. Many retirement plans will continue to pay your benefactors in the event you pass away. Some will not, though, and you may need to replace that income as well. This will not be a large issue for single individuals or those people leaving behind a huge estate. However, you should consider if your household will continue to make ends meet if your salary is lost.

Family Needs

Along with salary replacement, should also consider the cost of replacing you in the home; for example, if you cannot complete your chores, your family may need to hire someone to do so. These needs may be larger if you still have dependents in the home. Children tend to be the neediest, particularly if they have not yet attended college and do not have the savings to do so. Discussing this issue with your spouse or children may be difficult, but you should ask what type of expectations they have from you. If they expect you to purchase a wedding, a car or another asset for them, then you may need to leave enough behind to do so if you are gone.

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