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However, many Americans are dissuaded from buying adequate life insurance because they overestimate how much it will cost them. A recent study by LIMRA and the
The survey respondents who admitted they needed more life insurance coverage estimated it would likely cost around
Term life insurance provides protection for a specific period of time and typically offers the greatest amount of coverage for the lowest initial premium cost. Permanent life insurance, also known as whole life, offers lifelong protection and the ability to accumulate cash value on a tax-deferred basis, but has higher initial premiums than a term policy for the same face amount. The death benefits paid by life insurers are income-tax-free, allowing beneficiaries to replace an income-earner's income, or a family caregiver's services.
"Term life insurance can provide beneficiaries with a very cost-effective form of financial protection," said
The face-amount of a life insurance policy—the benefit payable to a policyholder's beneficiaries should the policyholder die while the policy is in force—should be sufficient to do three things.
- Replace Income: Buy enough life insurance so that, when combined with other sources of income, it will replace the income you, as the policyholder, now generate for your beneficiaries, while also financing the expenses your beneficiaries will incur to replace services you provide within the household (e.g., landscaping, tax preparation). Most families who lose their primary income-generator to premature death, and have children under the age of 18, have potential post-death income sources besides life insurance. The most common is
Social Securitysurvivors insurance. The maximum Social Securitysurvivors' monthly income benefits for a surviving spouse, and two children under age 18, could be about $2,400per month, which would increase to match inflation.
Stay-at-home parents, and those caring full-time for an adult family member, should also consider purchasing life insurance so that their children, or any adults needing full-time care, have the resources to hire professionals who can perform those tasks.
- Replace Employer-Provided Benefits: This is income that you receive through your employment but is not part of your wages. It includes things like the employer's subsidy of your health insurance premium, or the matching contribution to your 401(k) plan, and is often overlooked. The cost of replacing just your health insurance and retirement contributions could be the equivalent of
$2,000per month or more.
- Cover Death-Related Expenses: These include the funeral costs, taxes and administrative fees associated with "winding up" an estate and passing property to heirs. At a minimum, these expenses can total upwards of