How to assess your life insurance
There are many factors to consider
when deciding how much life insurance you need . . . Marital status,
your income, your dependents and their college expenses
. . just to mention a few. By
these and other
factors, you can get fairly comfortable with your life insurance
decision. You might also find our Need Assessment Worksheet helpful.
Insurance Needs Worksheet
By Ginger Applegarth
What’s your life worth? If you’ve shopped for life
insurance, that’s sort of what you’re trying to find
out. Chances are you’ve heard different people suggest vastly
different calculations on how to reach the right number.
The problem is that every person's situation is different, and
although your financial situation may look the same as your colleague’s
in the office next to you, your needs are different.
MSN Money's life insurance Needs Estimator is based on a time-tested
method used by reputable agents and financial planners for decades:
the capital needs analysis. The beauty of the capital needs analysis
is that it takes into account all of the quirks that make you and
your situation unique.
Calculating how much life insurance you need shouldn’t be
a guessing game. You can assess your needs -- and the needs of
your loved ones -- and make a calculated assessment. The Needs
Estimator walks you through typical costs like a funeral (the average
funeral in the U.S. is now more than $6,000, though the true sum
can easily reach $10,000 once a burial plot, flowers and other
costs are included), to the atypical, such as the special needs
slush fund most people should include in their insurance calculations.
(A safe estimate is about $20,000 to $25,000 to cover unexpected
one-time and ongoing expenses.)
Most important factor is your dependents
A lot of insurance advice seems to be based on your marital status
to determine your insurance needs. That's not exactly the issue.
The most important factor is if you have any dependents -- those
who are (or who will be) counting on you to support them, either
partially or fully -- and how many dependents you have. Here
are other major factors to consider:
||The kind of lifestyle you want to provide for
||Your non-working spouse, who wouldn’t have an income
if you died.
||Your working spouse, who would "retire" to raise
your children if you died.
||Other sources of household income (such as a second paycheck).
||Any debts that you want paid off (such as a mortgage, car
loan or credit card).
||Your family’s college expenses.
||Any special needs, such as a handicapped child or a child
who will never be self-supporting.
||Your parents, who may eventually become financially dependent
Even if you’re wealthy and think you might not need coverage,
think again. You still may need life insurance if your taxable
estate approaches $1 million if you’re single or $2 million
if you’re married -- in which case you should have already
done proper estate planning to minimize estate taxes. (For 2010
and beyond, the estate tax is repealed.)
If either of the above applies to you, and your estate doesn’t
have enough liquid assets to pay estate taxes, you need more insurance.
The Internal Revenue Service will want cash from your estate within
nine months, and you might have to invest in a life insurance policy
to do this.
Childless now, but what about the future?
If you’re married and don’t have children, your insurance
needs could vary from almost nothing to needing heavy coverage.
If your spouse can live on his or her income alone and you don’t
have a mortgage or don’t care whether it’s ever paid
off, your only need may be to cover any final expenses incurred
at your death.
You still should consider the possibility that your parents may
depend on you in the future, or that you may want to help pay for
college costs for a family member (a niece or nephew, for example).
Special needs of divorced people, singles
Divorced people have special insurance needs. If you fall into
that category, you’d better dig out your divorce agreement.
It may stipulate that you have to keep a certain amount of life
insurance in force for your ex-spouse or to pay your part of
your children's education. Even if your divorce agreement doesn’t
require it, if you have children, you should have life insurance
in order to leave them an inheritance and to cover your part
of their college costs.
Single people are often told that they don’t need insurance,
or that the small policy that comes with their work benefits is
enough. In many cases, that’s absolutely right. If you lead
a simple life with no mortgage and no significant other, a life
insurance policy may just be an unnecessary expense. There are
certain instances where you may need it, however. If one of these
scenarios applies to you, start thinking about life insurance:
|| You have a mortgage that is more
than the value of your house.
||A relative has co-signed on your mortgage; having
it paid off immediately at your death means he does not have
to make monthly payments until your home is sold, were you
to die with not enough insurance coverage.
||You have a friend or relative to whom you want
to leave money.
||You have bought a house with your live-in partner
and you have an agreement that each person’s share of
the mortgage is to be paid off upon his or her death.
||Your parents won’t be able to manage financially
if you’re not around.
||You want to leave money to a charity or other
Insurance Needs Worksheet
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