People purchase life insurance for many reasons, most of which deal with 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 spouse, parent, or breadwinner of the family.
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According to a recent survey by LIMRA, 34% people mentioned this reason for owning a life insurance.
Replacing lost income is often overlooked when purchasing insurance mostly because other concerns take precedent. However, it is a vital consideration especially for younger families or those on fixed incomes. The financial turmoil that occurs when the breadwinner of the household is no longer around is one that may cause considerable hardship.
Why is Replacing Lost Income so Necessary?
The loss of 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 the financial impact their loss has until it’s too late.
Without the income of the breadwinner, meeting expenses, paying off debt, and dealing with bills becomes a far 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. To avoid this result, it is crucial that your life insurance benefits include enough to cover the lost wages.
How Much Income Should Be Replaced?
There is no exact amount since every family has their unique situation. You will need to take into account your expenses, how much they were paid by the loved one who is gone, and the total amount of debt that 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 a 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. It is true that a life insurance policy with $500,000 worth of benefits is far more expensive than one of $50,000.
But when you consider the amount of debt you may pile up because of the lost wages, then having a benefit level high enough to cover expenses for six months will bring you peace of mind.
The bottom line:
In the end, the grief over the loss of 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.