By Derrick Allen Brooks
The main purpose of life insurance is to provide financial security for your family. It helps to ensure that when you die your family will have the financial resources it needs to provide for your spouse, children, an elderly parent or some other dependent.
However, life insurance also may be used to meet a variety of long-term financial planning goals. It can help provide educational funds for your children or funds for your own retirement. The question that most families and individuals have, then, is “How much life insurance do I need?” The answer depends largely on your family’s individual circumstances.
There are no hard and fast rules for determining how much life insurance is enough, because no two families have exactly the same needs. You may be single, supporting no one but yourself. Or, you may be supporting an elderly mother or father. You may have several children, but also two incomes and considerable net worth. Or, you may have
several children, be dependent on one income and have few back-up resources. Whatever your situation, if you are providing financial support for people who are depending on you, you need life insurance. However, there are several things to keep in mind when you buy life insurance, since the proceeds can be used with several goals in mind. For example, proceeds can:
Provide ready cash for final expenses. These could include funeral costs, medical expenses, probate fees and estate taxes.
Pay off outstanding debts – not only hospital bills, for example, but a mortgage or an auto loan.
Provide replacement income in amounts necessary to cover:
A readjustment period of two or three years after your death. If you are a two-income family, it takes time to adjust to one paycheck instead of two. If you are the sole wage earner, with young children at home, your spouse’s need for a readjustment period is obvious.
The period while children under age 18 still are at home and dependent. (Social Security benefits that may be available supply only part of your family’s income needs.)
The college years, when Social Security benefits for dependents come to an end just as expenses grow.
The years between the time the
youngest child becomes independent and the time the surviving spouse reaches retirement age.
The period after the survivor retires and receives Social Security or a pension.
In general, determining how much life insurance you need means deducting the sum total of the income that would be lost upon the insured’s death from the sum total of your family’s ongoing financial need. It also means calculating the impact of inflation and building in enough “extra” to counteract inflation’s effects. It may seem complicated, but it is an exercise that is well worth doing. It is also one that you do not have to tackle alone.
A life insurance agent or licensed financial planner can help determine how much life insurance your family will need over time, based on the extent of your financial responsibilities and the kinds and amounts of your other resources. It may be that the solution to your insurance needs may entail using a combination of several plans, and the combination may need to be changed as your situation changes.
Derrick Allen Brooks is a Financial Representative with the Northwestern Mutual Financial Network based in Okemos, MI for The Northwestern Mutual Life Insurance Co., Milwaukee, WI. For more information, please call 517-349-0260 ext. 122.
Printed in Volume 1 issue 10