How
Much Life Insurance Do You Need
The main purpose of life
insurance is to provide financial security for your
family. It helps to ensure that when you die your family
will have the financial resources it needs to provide
for your spouse, children, an elderly parent or some
other dependent. However, life insurance also may be
used to meet a variety of long-term financial planning
goals. It can help provide educational funds for your
children or funds for your own retirement. The question
that most families and individuals have, then, is "How
much life insurance do I need?" The answer depends
largely on your family's individual circumstances.
There are no hard and
fast rules for determining how much life insurance is
enough, because no two families have exactly the same
needs. You may be single, supporting no one but
yourself. Or, you may be supporting an elderly mother or
father. You may have several children, but also two
incomes and considerable net worth. Or, you may have
several children, be dependent on one income and have
few back-up resources. Whatever your situation, if you
are providing financial support for people who are
depending on you, you need life insurance. However,
there are several things to keep in mind when you buy
life insurance, since the proceeds can be used with
several goals in mind. For example, proceeds can:
—Provide ready cash for
final expenses. These could include funeral costs,
medical expenses, probate fees and estate taxes.
—Pay off outstanding
debts - not only hospital bills, for example, but a
mortgage or an auto loan.
—Provide replacement
income in amounts necessary to cover:
- A readjustment period
of two or three years after your death. If you are a
two-income family, it takes time to adjust to one
paycheck instead of two. If you are the sole wage
earner, with young children at home, your spouse's
need for a readjustment period is obvious.
- The period while
children under age 18 still are at home and dependent.
(Social Security benefits that may be available supply
only part of your family's income needs.)
- The college years,
when Social Security benefits for dependents come to
an end just as expenses grow.
- The years between the
time the youngest child becomes independent and the
time the surviving spouse reaches retirement age.
- The period after the
survivor retires and receives Social Security or a
pension.
In general, determining
how much life insurance you need means deducting the sum
total of the income that would be lost upon the
insured's death from the sum total of your family's
ongoing financial need. It also means calculating the
impact of inflation and building in enough "extra" to
counteract inflation's effects. It may seem complicated,
but it is an exercise that is well worth doing. It is
also one that you do not have to tackle alone.
A life insurance agent or
licensed financial planner can help determine how much
life insurance your family will need over time, based on
the extent of your financial responsibilities and the
kinds and amounts of your other resources.
It may be that the
solution to your insurance needs may entail using a
combination of several plans, and the combination may
need to be changed as your situation changes.
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