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DeterminingYourLifeInsuranceCoverageNeeds
Likeautoinsurancecoverage,itissometimesdifficulttoseethetruevalueoflifeinsurancecoverageuntilyouactuallyneedit.Inthemeantime,theonlyway youwillfeelcomfortablewithyourlifeinsurancepolicyisifyouunderstand,andagreewith,thereasonsyouboughtitinthefirstplace.
Therearemanyreasonsforanindividualtoownlifeinsurancecoverage.Perhapsthemostcompellingreasonistopurchaseadeathbenefitwhichwillprovide forthefinancialneedsoftheirsurvivors.
Determininghowmuchlifeinsurancecoverageyouneedisafourstepprocess:
1.Determinetotalshorttermneedsintheeventofyouruntimelydeath
2.Determinetotallongtermneedsintheeventofyouruntimelydeath
3.Determinetotalresourcesavailabletofamilymembers
4.Provideinsurancecoverageforanyremainingshortfall
DeterminingYourTotalShortTermNeeds
Shorttermneedsarefinancialobligationsand/orexpensesarisingwithinsixmonthsofdeath.Examplesofshorttermneedsincludeexpensesyoupaynowsuch as:
loanbalances(automobileloans,etc)
outstandingcreditbalances(creditcards,revolvinglinesofcredit,etc)
mortgages(firstmortgage,secondmortgage,equityloans)
Addtothesecurrentexpensesanydeath-relatedexpenseswhichmustbepaidintheshortterm:
funeralexpenses
finalmedicalcosts
estatesettlementcosts
estatetaxesdue
charitablebequestsyouwouldliketomakeatdeath
Andifyoudon'talreadyhaveone,yoursurvivorsshouldbeleftwithaliquidemergencyfundsufficienttogetthemthroughanyunexpectedfinancialneeds, perhapssixmonthsworthoflivingexpenses.
DeterminingYourTotalLongTermNeeds
Inadditiontocoveringyoursurvivors'shorttermneeds,somelevelofmonthlyincomewillbeneededtomaintaintheirstandardoflivingandmeetfinancial goalsyouhavemadetogether Theselongtermincomeneedsinclude:
afutureincomestreamtocoverstandardoflivingitems(werecommendthatyouidentifyseveraltimeperiodswithuniqueneedssuchaswhilekidsarein home,whenkidsaregone,andyourspouse'sretirementyears.) collegeexpensesthatyouwouldliketocoverforyourdependents elderlycareexpensesyouplanoncontributingforrelatives monetarysupportforadisableddependent mortgages(firstmortgage,secondmortgage,equityloans) childcarecostsifyourspousewillworkafteryourdeath
Thevalueofthesefutureobligationsisdiscountedbacktopresentvalueamounts.Thisgivesusasingledollaramountwhich,ifinvested,couldprovidefunds forallofyourlongtermgoals.
CalculatingYourTotalAvailableResources
Atthispoint,wehaveaprettygoodideaofwhatyourtotalcashneedwouldbeintheeventofyouruntimelydeath. Withanyluck,youhavealreadybegunto setmoneyasidetocoversomeofthesecosts,andthegovernmenthasaplantohelpyouaswell.
Estimatedearnedincomeofyoursurvivor(s)
SurvivorSocialSecuritybenefit(continueswhileyouhavechildrenundertheageof17)
RetirementSocialSecuritybenefit(beginsapproximatelywhenyourspouseturns66)
Survivorbenefitsfromyourpensionplan
Thevalueofthesefutureresourcesisdiscountedbacktopresentvalueamounts.Thisgivesusasingledollaramountwhichwecanusetooffsetyourtotal needs.
ProvidingFundsToCoverAShortfall
Whenwecompareourtotalneedstoourtotalresources,mostofuswillfindashortfall.Ashortfallsituationmeansthatoursurvivorswillbeleftwiththechoice ofeitherfindingadditionalresourcesthatwehavenotbeenabletoidentify,ordowithoutmanyofthefinancialneedsthatyouhopetocover
Lifeinsuranceisuniquelysuitedforcoveringsuchashortfall.Itisameansofsharingthefinancialriskofprematuredeathwithmany,manyotherswhohave similarconcerns.
Youpayarelativelysmallpremiumtoaninsurancecompanyinexchangefortheirpromisetopayyourbeneficiariesaspecifieddeathbenefitintheeventof yourdeath.Afinancialneedthatarisesfromyourdeathcanbeeliminatedbyafinancialresourcethatiscreateduponyourdeath.
FactorsToConsiderWhenSelectingLifeInsurance
Inanidealworld,wewouldeachcarrysufficientlifeinsurancetocontinuetoprovidealifestyleforoursurvivorssimilartowhattheyenjoynow,withushere. Wecannotalwaysaffordtofullycoveroursurvivorneeds,particularlyinourearlyyears.
However,lifeinsurancecomesinmanyshapesandsizes.Bycarefullyconsideringthetypeandamountoflifeinsurancethatbestmeetsyourneedsyoucan ensurethatyouhaveprovidedforyourfamily'smonetaryneeds,evenifyouarenotheretodotheproviding.
Materialdiscussedismeantforgeneralillustrationand/orinformationalpurposesonlyanditisnottobeconstruedastax,legal,orinvestmentadvice.Although theinformationhasbeengatheredfromsourcesbelievedtobereliable,pleasenotethatindividualsituationscanvarytherefore,theinformationshouldberelied uponwhencoordinatedwithindividualprofessionaladvice.
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