Insurance is a complicated business, and it can be unpleasant to talk about because no one likes talking about death… especially their own death! Because of those two reasons, many people do not think about insurance very much. However, most people should have some kind of insurance.
But how can you tell what kind of insurance you need? It is such as specialized industry, with insurance brokers requiring licenses in order to understand it and sell it, so it can sometimes make you feel like you are at the doctor and you have no idea what the doctor is talking about! What makes matters worse, is that insurance brokers (the only people who know what they're talking about) are usually paid by commission based on the amount they sell. So, while you are likely to get an insurance broker who is a good, ethical person, you might still be concerned that they are overestimating your need.
So how much do you need?
There are two secrets to knowing how much insurance you need:
1. Determine the need. The first is to identify the costs that will be incurred at your death and the expenses that will go on after your death. Cost that will be incurred at your death include estate taxes, funeral costs, and wages that your loved ones will lose as they take time off of work to mourn for you. Costs that will go on after your death are things like, the mortgage on your house, as well as car payments, saving for the children's education, the wages you'll no longer be able to provide to your family.
2. Determine the period. The second step is to identify whether these expenses are short-term expenses are long-term expenses. Temporary expenses are ones that will only cost you money if you die within a certain period of time. Temporary expenses include your children's education and your house and car. It is possible, that these may be paid off before you pass away. However, if you die before they are paid off, it is good to have insurance to cover the rest of the payments. On the other hand, permanent expenses are things that will always be around. For example, your estate taxes, funeral costs, and the wages that your loved ones will lose when they mourn for you are all costs that occur once and they can be paid off… but it doesn't matter when you die, those costs will always be there.
Once you have done these two steps you will have a pretty good idea of how much insurance you need and how long you need it for. Now you are ready to talk to your broker and you'll have a pretty good idea what they're talking about. Bring the list with you and ask them to address each one. They may suggest the more coverage (and sometimes they may suggest less coverage) but having a little bit of knowledge before you make the appointment will give you an advantage and helped you know how much insurance you actually need.