Protecting your family against the financial consequences of
your death should be part of your total financial plan. The decisions you
need to make are:
How much do you need?
What type should you buy?
Where should you buy it?
No one likes to think about dying and as a result, many
individuals put off making these decisions. Here are some guidelines that can
make the process easier.
How much life insurance?
While some individuals use life insurance as part of sophisticated
estate plans, for most life insurance is simply a way to make sure their
spouse and children can continue to have a decent lifestyle if they die
prematurely.
Single individuals, or married individuals with working spouses,
may find their real need for life insurance to be low or non-existent. If no
one is dependent on your income to maintain their financial independence, you
should carefully consider whether spending for life insurance is the best use
of your funds. It could be that your savings and investments will be
sufficient.
If others are dependent on your income, life insurance should be
part of your financial strategy. There are many complex ways to calculate the
amount of coverage you should consider that take inflation, debts, children,
retirement plans and estimated investment returns into account.
If you want that type of calculation, try some of the insurance
websites. If you want a simpler approach, consider that many insurance
experts say that a "primary breadwinner" should have coverage equal
to six to ten times income. For example, if you have income of $75,000, you
may want to have life insurance policies providing $450,000 to $750,000 of
death benefits.
If you have young children, dependents with special needs, large
debts or other special considerations, you may want to be on the high end of
this range (or above). For example, if you expect a child to attend a private
college, the annual costs could be over $40,000. To cover those expenses, you
may want to increase your coverage by some multiple of the annual cost to
cover four years and to take potential inflation into account.
What type of policy is best for you?
The two basic types of life insurance policies are - term and cash
value whole life. Term insurance is just pure protection, payable on the
death of the insured and is cheaper. Cash value whole life policies provide
death protection and have a "cash build up" feature that acts
somewhat like a tax-deferred savings account. Usually, whole life insurance
is much more expensive. The accumulated "cash value" can also be
the source of low interest loans for the policyholder. When evaluating these
types of policies, be sure to consider all the costs, the amount of death
benefits and ask for a history of what the level of earnings on the
"cash value" the insurance company has paid previously. You may
find that it makes sense to "buy term and invest the rest."
Where can you find life insurance?
The first place to begin is with your employer. Many companies
offer some life insurance as part of their employee benefit program. In some
cases, the companies pay the entire cost for a certain level of benefits and
then offer a supplemental insurance option. You often may have the ability to
buy a policy with benefits of one to three times your annual income. The
rates on these types of group plans are often very attractive.
Next, determine whether you need the consultation services of an
insurance agent. Many financial institutions offer insurance through their
investment departments and have both term and whole life policies
available.
If you are considering life insurance as part of a sophisticated
estate plan, it may make sense to search out the services of a dedicated
insurance agent.
In any case, be sure to ask questions and get the coverage amount
you need in the type of policy you want. Investigate the insurance company.
The agent should have ratings reports available on the insurance company.
Many public libraries also have these ratings available.
Summary
Few people like to think about dying or the need for life
insurance. Be sure your financial plan provides the protection your family
needs.
