No one likes to contemplate their own demise or that of a loved one. For these reasons, many do not take the time to adequately consider, let alone purchase sufficient life insurance. Since complex calculations are necessary to determine the proper level of coverage, you will need to speak with a qualified life insurance consultant before you make your final decision. Nevertheless, you can start this process by considering the following factors:
Calculate Life Insurance Need
What is the quality of life you would like for your family? You will need to plan on how an insurance payment will be invested, what rate of return can be expected, and the annual income it will provide.
Would your spouse be able to provide income, or would he or she have to retire to tend to the family? It is easy to imagine that a spouse can continue to provide for their family after their non working partner has been deceased, but it may be necessary to leave a full time job to take care of the children and the household.
Do you have other types of household income beyond your normal paycheck? This can include investments, child support, or a second job. You will need to consider whether or not this income will be sustainable in your absence.
How do you plan on paying for your children’s education expenses? Are you currently funding their college savings account?
Do you wish to pay off or refinance your mortgage with the proceeds of a life insurance policy? This may be the most important factor in retaining your family’s present quality of life.
Are there any other debts that would need to be retired? These can included student loans, credit card payments, or car loans.
Are there any other members of your family, such as parents, that will need your support? Always consider those other than your immediate family.
Will you owe any estate taxes to the IRS? It is no use to properly plan for your insurance without taking into consideration your survivor’s tax burden. This is why it is essential to take taxes into consideration when designating a beneficiary for your Roth IRA.
How will you pay for your funeral expenses? This is another necessary consideration.
If you are divorced, how will your divorce agreement require you to maintain a certain level of life insurance? Closely read your divorce settlement to determine if you are required to maintain life insurance of a particular amount.
How can your retirement savings be used to meet your survivor’s needs? While your survivors will need retirement funds, the amount will differ in your absence.
There is no doubt that these are all very difficult questions to ponder. Fortunately, there are many different web sites that offer calculating tools to help you to begin to estimate your needs. In the end, only a trusted insurance professional will be able to help you and your family reach the final calculation and select the best product for your needs. Even then, it is recommended that you re-assess your needs each year, as circumstances will inevitably change. A common rule of thumb for life insurance needs is to multiple your annual income by ten, but this may not be the perfect shortcut calculation for your individual situation. Evaluating your life insurance needs and purchasing a policy may seem like grim tasks, but you should never forget that they are a necessary responsibility for families who wish to insure their lives in order to ensure their future.
Jason D. Steele is personal finance writer and a consumer advocate. He specializes in helping people eliminate credit card debt and maximize rewards. His work can be found at personal finance sites like Money Crashers and Ask Mr Credit Card.
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