A life insurance policy is meant to safeguard your loved ones in the event of an untimely death. In reality, it’s critical to carry life insurance and to ensure that your policy pays a high enough death benefit to sustain your loved ones in the event of your passing.
There are various formulae you may use right now to figure out what death benefit to lock in. However, one way to figure out the amount of life insurance you require is to strive for a multiple of your annual wage. The multiplier may be five, seven, or ten times your yearly salary.
So let’s assume you make $80,000 annually and decide you want coverage equal to ten times your income. Therefore, the death benefit is $800,000.
However, what if your salary increases over time? You can only hope that happens. However, when do you need to reevaluate your life insurance benefit?
Small wage increases are unlikely to require adjustments.
Your income often gets slightly raised from year to year. To help employees preserve their purchasing power as inflation raises the cost of living, many businesses, for instance, offer cost-of-living raises.
It’s usually not necessary to start reevaluating your life insurance plan if you receive a little boost, like 3% or less. In fact, even if you receive raises of 3% annually for several years, you can still be satisfied with your insurance level.
Maurie and her husband got their life insurance policy after they had kids. However, it was based on their income at that time. Now they have the option to either increase their life insurance after Maurie’s income increases. She shares her story and how the decision might impact their lives.
“Admittedly, until we started thinking about having children, my husband and I didn’t consider purchasing life insurance. But at that point, we knew coverage was necessary to guarantee their financial security.
“My husband and I filed for life insurance at a time when his income was significantly more than mine. Therefore, we purchased two times as much life insurance for him as we did for me.
“But now that my income has surpassed that of my spouse, we’ve discussed raising the amount of my life insurance coverage. But for now, we’ve decided against getting higher coverage for one significant reason. “
When the protection you have is adequate.
“My husband and I decided a long time ago to try and pay our necessary bills with only his salary. This is not to argue that we don’t need my income. The money I make goes toward summer camps, recreation, extracurricular activities, vacations, college savings, regular savings, and retirement savings, among other things.
“However, my husband’s income is only used to cover expenses like our mortgage, cars, groceries, and utilities. In fact, we’ve taken care over the years to avoid incurring unnecessary costs that his income alone couldn’t pay for. We also made the same assumption when purchasing our life insurance, namely that we would need enough protection to replace my husband’s and my combined salary for approximately ten years.
“My life insurance coverage won’t cover ten years of lost income any longer. But that’s okay because my hubby has better coverage. We believe we still have appropriate coverage for our children because we didn’t upgrade our lifestyle by taking on more debt as our income increased. “
You should continue to run the numbers.
“I have decided not to purchase additional life insurance at this time because I have evaluated our situation and found it unnecessary. But if your income changes over time and your expenses go up, as a result, it could be necessary to conduct your own calculations again to ensure you have enough insurance in place.”
Of course, not everyone transitions to a better lifestyle as their income rises. Instead, they increase their financial cushion by using their excess income. Also, those in this boat might not need to change their life insurance. More life insurance might make sense, though, if your income has increased, you’ve recently upgraded your house, doubled your mortgage payment, and increased your property tax obligation.
Maurie shares, “In the interim, I might change my life insurance policy at some point, particularly if we decide to take on higher expenses later on, such as a more expensive home to purchase and maintain. But for the time being, we will continue to live in the same house and enjoy the same lifestyle we did when my income was somewhat lower. We’ll leave my life insurance coverage in place for the time being.”
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