Don't Forget This Factor When Buying Life Insurance

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  • Many people buy enough life insurance to replace a certain number of years of income.
  • It's essential to recognize that the value of your salary could erode over time, due to inflation.

It's an important thing to consider.

If you have people in your life who stand to get hurt financially in the event of your passing, then it's essential that you put a life insurance policy in place. And you may want to opt for term life insurance over whole life insurance due to the gigantic difference in cost.

But that's not the only life insurance decision you'll need to make. You'll also have to decide how much coverage to buy.

Now a good rule of thumb is to secure enough coverage to replace 10 times your salary. And some experts will even tell you that you ought to replace 20 or 25 times your salary.

The number you land on will hinge on different factors, such as whether you're the sole earner in your family, who you're trying to support (and their respective ages), and the other income sources you might be able to leave your survivors with. For example, if you have a $100,000 savings account balance, that's money your heirs can use to pay their living expenses in your absence.

But the amount of life insurance you decide to get may end up falling short for one big reason. And it's important to account for that when doing your calculations.

Don't forget about inflation

Many people are familiar with inflation these days. But while inflation was notably rampant in 2022, the reality is that inflation is something that tends to be persistent.

To put it another way, the cost of living tends to rise over time, and the value of a dollar tends to erode over time. That's something you should absolutely account for when calculating the amount of life insurance you need.

Let's say you earn a salary of $80,000 a year that covers your family's expenses in full, and you want to put enough coverage in place to replace your salary 10 times over. That means you're potentially looking at an $800,000 life insurance policy.

You might assume that if you buy that policy, you're ensuring that your family can pay their expenses for a decade in your absence without anyone having to go out and earn money. But remember, while your family might manage to get by on $80,000 a year right now, who's to say if they'll be able to get by on $80,000 in 10 or 15 years from now?

And so rather than stick to $80,000 as your baseline for calculating your coverage, you may want to inflate that number to account for your family's future spending needs. That could mean buying $1 million in coverage versus $800,000. Or, it could mean buying an $850,000 or $900,000 policy if $1 million is too much of a financial stretch.

Don't leave your loved ones short

The whole purpose of getting life insurance is to protect the people you care about financially. So you might as well really get the job done by putting enough coverage in place to account for not just your family's current financial needs, but also, their future needs.

Our picks for best life insurance companies

Life insurance is essential if you have people depending on you. We’ve combed through the options and developed a best-in-class list for life insurance coverage. This guide will help you find the best life insurance companies and the right type of policy for your needs. Read our free review today.

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