Insurance above and beyond? – Dave Says

Dear Dave,

When it comes to buying life insurance, should the coverage amount be based solely on current earnings? I have good reason to believe my income is going to increase significantly soon.

Wesley

Dear Wesley,

The purpose of life insurance is to take care of your family if something unexpected happens to you. You don’t want to buy too much, but you should have enough to ensure that they’re well taken care of when you’re not here any longer.

I usually recommend people have 10 to 12 times their annual income in a good, level term life insurance policy. However, if you have a solid reason to believe your income will be jumping significantly soon, there’s nothing wrong with basing your coverage amount on that figure—if you can afford it, of course.

Understand that when I say, “solid reason,” I’m not talking about a hopeful attitude. I’m talking about something along the lines of finishing a medical residency, then making the jump to a six-figure income. That’s the kind of logical thinking and planning I’m working with here. In that scenario, or something similar, a huge jump in income is virtually assured.

Great question, Wesley!

—Dave

Term life insurance, too?

Dear Dave,

My husband and I are wondering if we need term life insurance policies. We both have accidental death and dismemberment coverage provided free of charge through our employers. Do we need additional coverage?

Rebecca

Dear Rebecca,

Yes, you both need to find good level term life insurance immediately! Accidental death and dismemberment policies are nothing but gimmicks. You need to make sure your family is taken care of in the very best way possible, no matter how you die.

You should always have life insurance coverage that’s separate from anything an employer may offer. Think about it. You don’t want to suddenly lose coverage if you change jobs, or have to leave your place of work because you’re diagnosed with a major medical condition.

Both of you need 10 to 12 times your yearly incomes in good, level term life insurance. If you make $50,000 a year, that means you need $500,000 to $600,000 in coverage. Remember, the idea of life insurance is to take the place of income. If one of you died, the other could invest the insurance money, make 10 percent on that money over time with good mutual funds, and replace any lost income.

Term life insurance is very affordable. For just a few dollars a month you can leave your loved ones in great financial shape after you die!

—Dave