Life insurance is somewhat opposite of automobile insurance. Rather than having high prices at a young age that reduce as you get older, life insurance begins inexpensive and becomes more costly as you age. The reason being is quite simple: with automobile insurance, the older you are, the better you are at driving which makes you less likely to need coverage for accident costs; with life insurance, the younger you are, the healthier you are which reduces the cost of monthly payments.
Due to these stark differences, it can seem somewhat confusing determining when is the right time to buy life insurance. While it’s well known that life insurance is cheaper at a younger age, does that mean that all 20-somethings should be making monthly payments for life insurance?
No, not exactly. Here are a few factors to consider before purchasing life insurance:
- What is your situation?
- Are you single or married?
- Do you both work?
- What does your savings account look like?
- Are you planning on starting a family?
- What stage of life are you?
- How is your health?
- How old are you?
- Are you starting a business or buying a home?
After reading these questions, use your answers to determine your debt to income ratio. Using this ratio, calculate whether your savings would cover your funeral costs and remaining debt, etc. If it seems that there will be no left-over debt and funeral costs would be covered, you may not need the insurance. However, if a family is on the way, or if you’d like payments to be cheaper as you get older, it may be smart to get covered now. If it is clear that you will pass along debt to your heirs, it is time to look for coverage.
Once you’ve realized your need for life insurance, you will want to discern how much life insurance you’ll need. While some financial advisors may say you need to ensure five to seven times your salary while others say you need more, it is essential to consider your circumstances. A good rule of thumb, however, is to ensure three times your income plus debt. Consider the following:
- Your annual salary: multiply this over the years you want to be covered.
- Add any fixed expenses (college tuition, etc.)
- Subtract savings and investments that could cover other costs (such as college tuition)
It is important to remember that people’s needs change from year to year; life insurance is a valuable financial tool, although not everyone needs it at the same time. Depending on your age, family situation, income, and dependents, you will need to assess your own needs to find the right amount and length of coverage for you and your family.