Life Insurance - How Much is Enough?
Life Insurance - How Much is Enough?
If you are like most people, you probably said no to the first question and yes to the second one. After all, a single person with no dependents doesnt necessarily need to provide for anyones future support. On the other hand, if youre married with children, you probably want your family to continue to live as well as they currently do. They will need assets, and the income they produce, in order to accomplish that goal.
The real answer to both questions is likely a "yes." If you have only yourself to support, you may not need a large life insurance policy, but its only fair to leave enough behind to pay your final expenses.
What to Consider
So how much insurance do you really need? Thats a question you and your financial advisor(s) need to answer after looking at all of the relevant facts. The purpose of this article is to give you a general idea of how to go about determining those insurance needs.
One of your first considerations is to provide for your final costs and the best place to do that is at a funeral home. Your estate may also have expenses associated with attorneys, appraisers, accountants and estate taxes, as well as the cost of maintaining your assets while the estate is being settled. Your financial advisor should be able to guide you in developing an estimate of these.
Next, you need to estimate the debts that you will leave. Typical debts include final credit card bills, home mortgages, other unsecured debt, and the many monthly utility and other household bills you pay each month. You may also want to consider unpaid income taxes, as well as debts secured by investment properties.
One of your major goals in providing for your family will be replacing your income. Losing a family member is devastating enough, but without adequate funds available to help your survivors maintain their present lifestyle - well, lets just say that less stress than this has caused families to disintegrate. When considering what will be needed to replace your income, take into account what living expenses the family may incur. While some of them may decrease, health insurance and other medical costs could actually go up. Your spouse may incur higher costs for child care as well. Dont assume that expenses will decrease when, in fact, they could well increase, especially when you consider inflation. You will receive some help in the form of Social Security Survivors Benefits, but these probably wont come close to covering your familys needs.
Once you have a handle on what your survivors will need, take a look at your current assets. Will these be enough to take care of your family? Do the assets produce amounts that will help ease the burden of losing your previous income? If needed, can the assets be liquidated to cover debt or keep the family going? Some assets are highly illiquid and need to be excluded from the picture when calculating your familys ongoing support needs.
With all of the preceding information, you now have a basis to determine potential life insurance needs. Simply subtract expected resources from expected needs and the result is what will be needed to protect the family. You and your financial advisor will then be able to develop a plan to protect your loved ones that includes life insurance.
You could probably find numerous sites on the Internet that provide insurance need calculators. In addition, you might want to take a look at the following sites:
Even though your death will be an end for you, you will most likely leave survivors who depended on you. Its important now to devise a plan to take care of their needs if you are no longer in the picture. To be sure, there will be a trade-off between what you need and what you can reasonably afford, but providing your family with some measure of protection is one of your final obligations. Give us a call and let us help you develop a financial plan that will ease the burden on your family.
Have a great Thanksgiving.
These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.