Personal Finance

graphic of man thinking If you’ve never asked yourself before, consider it now: What would happen to your loved ones if you passed away?

Beyond the emotional effects of their loss, the financial consequences could drastically affect your family’s quality of life and their future. Would your spouse be able to pay the mortgage? Would your family be able to live the same way they do now? Could your kids go to college?

You may not be able to promise them that nothing will ever happen to you, but you can provide for their financial security by purchasing life insurance.

HOW MUCH IS ENOUGH?
While some experts recommend you buy five to seven times your annual salary, that number is just a rough starting point. You could need more or less depending on your age, the number and age of dependents you support, and your financial situation. For instance, older people with grown kids and paid-up mortgages may need much less life insurance than a young couple with small children in a newly purchased house.

A life insurance policy should cover your family’s immediate financial needs upon your death, and it should replace the contribution you would have made to their living expenses in the future.

CALCULATE YOUR NEEDS
First add up immediate and one-time costs:

1. Costs at death: funeral expenses, costs of settling the estate, unpaid medical bills (typically $10,000)

2. Outstanding debts (exclude mortgage)

3. College fund (a one-time sum for your family to invest that replaces your expected contribution to your children’s college funds)

Total one-time costs =

Now calculate your family’s living expenses:

1. Annual living expenses (include mortgage)

2. Spouse’s take-home pay

3. Social Security survivorship benefit

4. Investment income

5. Number of years your family would need your income (for example, how many years until your children are employed?)

Total living expenses =

One-time costs (from above) +

Your estimated life insurance need =

You may want to adjust this total depending on your circumstances, such as a child with special needs or other extraordinary expenses.

GETTING ADVICE
With so many different types of life insurance available, all of them with different features and pricing levels, you may want to work with an adviser who can help you review your needs and explain your options.

The biggest advantage of working with a fee-only adviser who doesn’t earn commissions on products you buy is that you know the adviser won’t be tempted to suggest an expensive policy that doesn’t match your needs. However, some fee-based advisers also get commissions on certain products, so be sure to ask.

By making sure you’re getting the right coverage for your dollar, paying an adviser could save you money in the long run.

RISKY BUSINESS
Insurance companies want a complete picture of the risk you pose to them when they decide whether they’ll insure you and at what cost.

If you’re overweight, a smoker, or you go bungee-jumping every other week, you’ll probably pay a higher premium than other people of the same age or gender — if the company agrees to insure you. However, if you’re in good health and have a low risk profile, you might qualify for lower rates.

Be truthful on your application or your beneficiary may be denied benefits.

Choosing a Life Insurance Policy >>

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