Determine Life Insurance Needs
How Much Life Insurance
At some time everyone must take the time to determine their life insurance needs. These needs vary depending on the individual.
Some people need life insurance for family protection which in many respects cover a myriad of ideas.
Business people also have need for life insurance. Let us take a few minutes to examine some of the reasons some people need life insurance.
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Some Life Insurance Needs
- Family Protection
Everyone knows that if you have a family you must at some point consider buying some life insurance. There is an old saying in this business that “no man has a right to accustom a woman to a certain standard of living unless he intends that she continue to enjoy it when he is no longer alive and able to provide this standard of living”. The person who made this phrase popular did so at a time when not many women were out working at a job. In today’s world, however, most women work.
The life insurance needs as they pertain to family protection have changed a bit. We not only need to put life insurance on the life of the husband and father but we also should put a policy on the life of the wife. If either should die the income that the deceased parent earned has ceased. Life insurance can replace the income thus making life easier for the surviving parent and children.
What kind of need for life insurance would each parent have? That depends on the thinking of the particular family. Do they want to provide an income until the youngest child is age 18 or do they want to provide this income until the last child graduates college? After that do they want to provide a life income for the surviving spouse?
What about a fund to pay college expenses? Is that important to this family? We must also consider final expenses. This includes funeral expenses, attorneys fees, court costs, probate fees and any outstanding bills.
Now you want to know how much life insurance you should buy to cover your life insurance needs. As a rule of thumb you will need a policy for between 5 and 10 times your annual income, plus about $10,000 for funeral expenses. Attorneys fees, court costs etc will depend on the size of the estate. Don’t forget that you may need to pay Federal Estate Taxes. This depends on the size of the estate.
- Business Continuation
The untimely death of a business owner can be devastating to his or her family. If the business is a partnership or a corporation one owners death can leave the surviving partners or shareholders in a pickle. Take a look at the business life insurance page for information on the life insurance needs of the parties involved.
- Policies Applied To Need
It would probably be fitting here to discuss which policy is best applied to which need. It is usually appropriate to use a 10 year term policy , a 15 year term policy , a 20 year term policy , a 25 year term policy or a 30 year term policy for family protection needs…
You should determine how long you want to keep your policy and apply the appropriate term policy. Let us say your youngest child is age 4 and you figure you want to buy coverage that would be in force until s/he is age 25. You would buy a 20 or 25 year term policy for that purpose.
If you want to assure yourself that your spouse will get the proceeds even after the children are no longer dependent then you would buy a 30 year term or a universal life policy , depending on your age and your spouses age.
If your life insurance needs are limited to final expenses then you can apply any term policy, in an appropriate amount, to these needs. You just have to decide how long you figure you will need the policy.
As far as business people are concerned the policy will depend on how long you plan ahead. If your long term projections are for 10 years then a 10 year term policy will do for your buy sell agreement. If your projection are for 20 years then use a 20 year term.
If you intend to be around a long time and desire to pass on the business to your children then it may be wise to use a universal life policy or a whole life policy. If your life insurance need is for a key employee policy you would use a term policy. You could use a whole life or universal life policy if you want t give the cash value to this valued employee at retirement.
When you sit down to figure your life insurance needs keep in mind that life insurance proceeds are usually free from Federal Income Tax unless they are part of an estate…if you include the policy in your will.
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