Why You Need Life Insurance for Income Replacement
One of the main motivations for Americans who buy a life insurance policy is to secure income replacement for their loved ones. If you pass away, your life insurance benefit that is paid out to your beneficiary acts as an income replacement for the wages you are no longer bringing in. Having income replacement is unmistakably important to a family who has lost a loved one. Being left without the income or services the family member provided can add financial hardship to an already difficult grieving process. Even if the family member wasn’t the main breadwinner, income replacement is still essential. For example, if a stay-at-home parent passes away, there will need to be money to pay for a babysitter or daycare among other services the parent provided.
What kind of life insurance to get for income replacement
Your options are between term life insurance and permanent life insurance. Permanent life insurance is more expensive, but it is permanent so it won’t expire. Whenever you pass away, the benefit will be paid out.
If you’re looking for a more reasonably priced option, term life insurance is still effective. It’s generally sold in 10-, 20-, and 30-year increments. If you’re a parent and you’re looking to offer your spouse support if you pass away, then you should base your choice on the stage your family is at. Generally, you want to have this coverage at least until your children grow up and can care for themselves. At that point, you can choose another policy that would support your spouse alone. So, it’s smart to choose a policy that will last until your children are out of the house and established, when you can reassess your needs for another policy.
How to calculate how much income replacement you need
There is a common idea that you should have a benefit that is ten times your income. While this isn’t a bad idea, it’s not a one-size-fits-all. Instead, you should base it on your current and expected future income, as well as how many years you want the income replaced for.
For example, you could give your loved ones five years of income replacement to adjust. In this case, you may multiply your current income times five. But, if you’re expecting your income to increase throughout the years, you should take this into account. Also, you’ll want to look beyond daily living expenses to things like college savings, emergency funds, and other savings goals.
In the case of the stay-at-home parent who cooks, cleans, and looks after the children, these are costs you should incorporate. Look up the average cost of daycare, cleaning services, and anything else you do where your loved ones would have to pay someone to replace the work.
Also, things change unexpectedly. If you have a life insurance policy and suddenly get a big raise at work or change jobs to a higher pay rate, you can always supplement with a new policy. If your existing policy is geared to a lower pay rate, there is nothing wrong with adding a new policy that covers the gap.
Plan IV | Life insurance policies for income replacement
While it’s something that no one wants to think about, it’s important to plan for the possibility of passing away early. Without a plan, your loved ones could be left with financial hardship on top of emotional hardship. Do what is best for your family and find the life insurance policy that works for you. Our experts can walk you through the process to ensure that every one of your beneficiary’s needs are covered in the event of your passing.