Life Insurance Needs
How Much Life Insurance Do I Need?
A commonly quoted rule-of-thumb is that life insurance should equal at least six times your annual after-tax income. However, the real answer depends on your needs and your unique family, business and financial circumstances.
Many people buy life insurance for the following purposes:
- Ongoing needs for support, as a replacement for the deceased’s paycheck
- Immediate cash needs for such expenses as taxes, debts, burial, and estate settlement costs and taxes
- Future financial needs such as college costs and retirement income
To determine the amount of insurance you should have, it is necessary to list all of your financial needs and then perform the calculations. This is where your professional agent can be of assistance.
Another way to look at it:
The potential earning power of a wage earner is one of the greatest assets of a family. The main objective of life insurance is to protect the insured’s family and creditors against financial loss due to the death of the insured.
With two income families, the analysis is just as significant for each spouse, even though one may have higher current earnings.
Determining the best policy starts with an analysis of specific needs. Such needs vary, of course, from family to family, but the following categories normally apply:
- Final lump sum expenses, funeral and debt repayment
- Income for the family until children are self-supporting
- Life income for the surviving spouse
- Special needs, such as education and business situations
- Retirement income needs
Once the needs are identified and measured, the next step is to determine other sources of capital, income or benefits available. The difference between the family’s needs and the money available from other sources represent the amount of life insurance, which is needed.
After the amount of the life insurance need has been determined, we can evaluate what type of policy best suits your current financial situation. Your cash flow, other investments and savings pattern will be factors in making this decision.
Permanent life insurance builds cash values. Term life insurance offers the maximum amount of protection for the lowest initial outlay.
If term insurance is indicated for all or part of the protection, it is very important to consider the conversion options should you wish to change the policy at a later date. Closely examine the scheduled premium increases or benefit reductions as they vary considerably between life insurance companies.
A family's current and future tax structure should also be considered when evaluating different forms of life insurance. For example, variable universal life has some very attractive tax benefits, but they would be unusable to a retiree who had not been able to substantially fund the policy or who was in a very low income tax bracket.
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