Are you considering buying life insurance? That could be a wise idea, especially if you have dependents who rely on you for financial support. The foundation of any solid financial plan is having protection in place for your spouse, children and other loved ones should you pass away.
If you’ve never purchased life insurance, you may not be sure how large of a policy you need. Do you need enough to cover final expenses? Should you have enough to pay off your mortgage and other debts? What about long-term goals like college and retirement?
There’s no simple answer that’s right for everyone. Your life insurance needs depend on your unique goals and challenges. What’s right for you may not be right for someone else. Your best option may be to analyze your specific situation and think about the financial needs that could arise if you pass away. Below are four questions to help you start that process.
1. How much debt do you have?
Your family will be in mourning after you pass away. If you leave them saddled with substantial debt, they may also face serious financial challenges. You likely don’t want them to be in that situation.
Take some time and consider all the debts your family may face in the wake of your passing. Do you have credit cards or other consumer debt? What about a mortgage? Student loans?
Consider which of these debts you would want them to pay off with your life insurance death benefit. If they could pay off the mortgage, that would ensure their ability to stay in the family home. If they paid off credit card debt, it would eliminate monthly bills and help them stay on solid financial footing.
2. How much income do you bring into the household?
Life insurance isn’t just for paying debts and final expenses. It can also be used as an income replacement tool. If your family relies upon you for income, they may be in a tough financial situation without your paycheck. However, if you have life insurance, they can use the life insurance benefit to replace your income over an extended period.
First, think about how much income you bring in on an annual basis. Then, consider how long your family may need to replace your income. Would they need that support indefinitely? Is it likely your spouse would eventually be able to increase their income, thus eliminating the need for support? Do you have kids getting ready to leave the home? If so, the household income need may drop in the near future.
You can do quick math and multiply your income by the number of years your family may need financial assistance. This will give you a ballpark number for your income replacement needs. A financial professional can help you with a more thorough analysis to provide a precise figure.
3. What services would your family need if you weren’t around?
You probably support your family in ways that go beyond the financial. For instance, you may do most of the cooking and cleaning in the home. If you weren’t around, your family may need to hire outside help for those activities.
If you stay home with the kids, your spouse or partner may need to hire a nanny or send the kids to daycare in your absence. That could be a considerable expense. Think about how the household might run if you were not around, and how it could impact the family budget. If your loss could generate new expenses for the family, those expenses should be figured into your life insurance needs.
4. What are your long-term goals for your dependents?
Finally, think about what you would like for your spouse and children after you’re gone. You may want to help your kids go to college. Or, you may want to provide your spouse with a comfortable, early retirement. You can use life insurance to help them meet those goals.
Estimate the expense of each goal and then think about how much of that you can fund through life insurance. It may not be feasible for you to fund the entire goal, but you may be able to provide a significant amount of help.
A life insurance agent can help you determine the price amounts of insurance you need by performing a needs analysis to help you better understand how much life insurance coverage is right for you.
This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.
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