ASSESS LIFE INSURANCE NEEDS
ASSESS LIFE INSURANCE NEEDS
Role of Life Insurance
The first step is recognizing that insurance has a key place in your family or business life. A critical second step is determining how much life insurance you may need.
Several factors will affect the cost and availability of life insurance, including age, health and the type and amount of insurance purchased. It is important to know that if some permanent life insurance policies are cancelled early, the owner may pay surrender charges and have income tax implications. It is definitely important to first ascertain whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.
Rule of Thumb
One widely followed rule of thumb for estimating a person’s insurance needs is based on income. One broad guide suggests a person may need a life insurance policy that is five times his or her annual income. Others take an assumed rate of return the beneficiaries may reinvest the death benefits at , say 5%, and back into the death benefit needed. For instance, replacing a $50,000 a year income at 5% you would need $1,000,000 in death benefit.
But if you are looking for a more accurate estimate, a retirement analysis with an advisor that looks at your assets, liabilities, income and expenses. This analysis, in conjunction with a detailed needs analysis, will help you, your family or your business partners determine the correct amount of coverage is being purchased – with little surpluses or shortfalls.
The detailed needs analysis should consider the following details.
Which funds will need to be available for final expenses, such as a funeral, final medical bills, and any outstanding debts, such as credit cards or personal loans? How much to make available for short-term needs will depend on your individual situation.
How much will it cost to maintain your family’s standard of living? How much is spent on necessities like housing, food, and clothing? Also, consider factoring in expenses such as travel and entertainment. These are needs that can be understood by an advisor with retirement planning software, such as Retirement Analyzer.
What additional expenses may arise in the future? What family consideration will need to be addressed, especially if there are young children? How about college costs? Factoring in potential new obligations allows you to grasp a realistic view and expectation of future expenses.
Next, subtract all current assets available.
Any assets that can be redeemed quickly and for a predictable price are considered liquid. Generally houses and cars are considered illiquid, unless you take a deep price discount.
Needs and obligations — minus liquid assets — can help you get a better idea about the amount of life insurance coverage you may need.