Why You Need Life Insurance
Why do I need life insurance? The main purpose of life insurance is
to provide cash to your family after you die. The money your
dependents will receive (the "death benefit") is an important
financial resource: It can help pay the mortgage, run the household,
end ensure that your dependents aren't burdened with debt. The
proceeds from a life insurance policy could mean that they won't
have to sell assets to pay outstanding bills or taxes. What's more,
there is no federal income tax on life insurance benefits.
Where do I
Begin? Start by evaluating your family's needs. Gather all your
personal financial information and estimate what your family will
need after you're gone. Include ongoing expenses (such as day care,
tuition or retirement) and immediate expenses at the time of death
(like medical bills, burial costs, and estate taxes). Your family
also may need funds to help them readjust... perhaps to finance a
move, or pay expenses while job hunting. Remember, life insurance
provides financial protection. If protection is not your primary
goal, you should consider other financial products.
How Much Life Insurance To Purchase
How much life
insurance will I need to purchase? While there's no substitute for
evaluating needs, one rule of thumb is to buy life insurance equal
to five to seven times your annual gross income.
Rough "rules of thumb" suggest
an amount of life insurance equal to 6 to 8 times annual earnings.
However, many factors should be taken into account in determining a
more precise estimate of the amount of life insurance needed.
Important factors include income sources (and amounts) other than
salary/earnings, whether or not the individual is married and, if
so, what is the spouse's earning capacity, the number of individuals
who are financially dependent on the insured, the amount of death
benefits payable from Social Security and from an employer-sponsored
life insurance plan, whether any special life insurance needs exist
(e.g., mortgage repayment, education fund, estate planning need),
etc. It is recommended that a person's insurance advisor be
contacted for a precise calculation of how much life insurance is
needed.
How much will it cost?
The cost for life insurance varies widely depending on the health
and age of the person to be insured and the coverage amount of the
policy. Individuals are rated by their age, health history and in
some cases, by their careers. All other things being equal, younger
people will generally have lower premiums that older people. The
best way to find out how much life insurance will cost is to get
quotes from multiple carriers.
What about life insurance for a spouse or children?
In certain circumstances, it may be advisable to purchase life
insurance on children; generally, however, such purchases should not
be made in lieu of purchasing appropriate amounts of life insurance
on the family breadwinner(s). It is of utmost importance that the
income earning capacity of the primary breadwinner be fully
protected, if possible, through the purchase of the required amount
of life insurance before contemplating the purchase of life
insurance on children or on a non-wage earning spouse. In a
dual-earning household, it is important to protect the income
earning capacity of both spouses. Life insurance on a non-wage
earning spouse is often recommended for the purpose of paying for
household services lost at this individual's death.
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