People purchase life insurance for many reasons, including covering funeral expenses, leaving behind legacies, or paying off debts. However, one of the most important reasons is to replace the lost income of the family’s spouse, parent, or breadwinner.
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According to a recent survey by LIMRA, 34% of people mentioned this reason for owning life insurance.
Replacing lost income is often overlooked when purchasing insurance because other concerns take precedence. However, it is vital, especially for younger families or those on fixed incomes. The financial turmoil when the household breadwinner is no longer around may cause considerable hardship.
Why is Replacing Lost Income so Necessary?
Losing a loved one is a deep, emotional impact that lasts for a long time. With the thoughts of the family consumed with missing such an important person in their life, there is little consideration for their loss’s financial impact until it’s too late.
Without the breadwinner’s income, meeting expenses, paying debt, and dealing with bills become a greater burden. It often takes several months before a family can adjust at least financially to the new challenges, and by then, a considerable amount of debt has been gained.
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To avoid this result, your life insurance benefits must include enough to cover the lost wages.
How Much Income Should Be Replaced?
There is no exact amount since every family has its unique situation. You will need to consider your expenses, how much they were paid by the loved one who is gone, and the total amount of debt you currently have.
A good rule of thumb is that you should incorporate around six months of lost income into the benefits of the life insurance policy. When you add in funeral expenses and coverage for significant debts, six months of income will provide a nice cushion so that bills can be addressed until changes can be made.
You may decide that six months is either too long or not long enough, but that should be based on careful consideration.
Is it Worth the Additional Premium Expense?
It is if you and your family will suffer considerably from the financial burden that has been imposed. A life insurance policy with $500,000 worth of benefits is far more expensive than $50,000.
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But considering the amount of debt you may pile up because of the lost wages, having a high benefit level to cover expenses for six months will bring you peace of mind.
The bottom line:
Ultimately, the grief over losing a loved one should not be compounded with impending debt and financial strain. This means going over your life insurance policy choices and selecting a benefit level that will provide ample coverage in case the worst should occur. By taking a few moments to prepare today, you can avoid spending months, if not years, in debt in the future.
