Life insurance: Not fun, but criticalDecember 09,2013
Maybe talking about life insurance isnít as bad as a root canal or as hard as talking with your kids about sex, but for most people, itís not fun.
Itís not fun for me to talk about and Iíve been talking about it with clients for years. Life insurance is a rather morbid subject. After all, you canít enjoy the payoff and others wonít benefit from it unless you are dead. How fun is that?
But life insurance serves a very valuable purpose and itís worth discussing for many of us.
The first question many people ask me is if they need insurance. That question is a relatively easy one. If someone depends on you financially, you need insurance. Itís really that simple.
If someone is dependent on your income, be it a spouse, partner, child or parent, you need insurance. If you have a nonworking spouse and children who depend on the spouse for child care, you need life insurance on that spouse. Having to provide for child care can be expensive.
The amount of insurance you need is less simple. You need to take into account your current debt, if you have children and want to provide some college funding for them, if you want to provide for a family emergency fund so your loved ones can replace your income, especially if you have children. Then thereís funeral expenses, and a few other factors, in order to determine your insurance needs.
A general rule of thumb is about eight times your annual income. So, if you make $60,000 a year, $500,000 of life insurance may cover the needs your income will replace.
For example, if you have a home and owe $200,000 on it to the bank, have two children and want to fund $100,000 for college for each of them, want to replace your annual income for 10 years for your family, provide your family with your funeral expenses, leave some money to your heirs ó you will need about half a million in term-life insurance for 15 years and about half that in whole life insurance.
Anywhere between five and 10 times your income can be used as a rule of thumb so itís best to not rely on such a general rule and either use an insurance calculator online or seek the advice of an insurance professional.
The cost of that insurance is almost as varied as human beings are and the factors that determine how much insurance will cost is more than I can address here.
For most people term insurance is enough. You pay a premium and are covered for the ďtermĒ of the insurance. Term is less expensive than whole life making it more affordable for younger people and itís younger people who tend to have younger children and they need the coverage.
Term insurance is ideal because you may not need insurance forever. As your children grow and leave the house, you may not be as dependent on insurance.
Itís also important to revisit insurance every few years. As interest rates fall, so often do insurance premiums.
There are many life insurance experts and if you have neither the time or inclination to do the research on your own, thatís what real live experts are for. There are also websites that can help you either to do some homework before seeking expert advice or to buy from directly.
A few to look at are accuquote.com, findmyinsurance.com, lifeinsure.com and insure.com.
Life insurance is not the most exhilarating of topics of conversation, but it is important to have that discussion. Look first to your employer to see if you have some coverage. Maybe all you need is some additional coverage.
Think of insurance as protection for those who matter most to you. Just as in life, do what you need in order to protect them if you were not here.
Karen Paul is a financial consultant in Burlington.
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