How much life insurance an individual should have depends on their financial circumstances and goals. One popular rule of thumb is to have a life insurance policy of 10 to 15 times the policyholder’s annual income. Some individuals aim to have a larger policy that covers their debts and also contributes to their loved ones’ day-to-day living expenses for a period of time.
Individuals who have large debts, such as for a house or a car, should consider covering the value of those debts with their life insurance policy. Since debts have interest added to them, individuals must consider how much that interest is and if the insurance carrier charges fees for early repayment. The policyholder’s goal should be to ensure their loved ones can cover the cost of any debts in the event of their death.
Those who wish to give the beneficiaries of the life insurance policy the stability of a steady income should consider a policy with an annuity option. They must consider the target interest rate of the policy and work out how large the policy needs to be to allow the beneficiaries to withdraw the interest each year without touching the actual value of the policy. They should keep in mind that the interest is taxable.
Another thing to factor into the target value of the policy is funeral costs. The median cost of a funeral with a burial is $7,848. A person who has specific wishes for how they want their funeral to be conducted should make sure any life insurance policy they’re considering covers any additional expenses that may be incurred when their loved ones carry out their final wishes.
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