Life insurance is not for you. It is for the people who depend on you! If you should die prematurely, your family and loved ones will certainly miss you. However, over the years, the gift they will miss the most is your financial support and the maintenance of their lifestyle.
If you have significant assets that can be converted to cash relatively easily, then your need for life insurance may be minimal. However, for most people, their financial asset base is relatively small, compared to their family’s future income needs. Life insurance provides a way “to rent” an asset base that is only available under certain conditions—the death of the insured.
Who Needs Life Insurance
“During these tough economic times, life insurance sometimes gets put on the back burner. However, if you are struggling to pay your bills now, just think how tough it would be for your dependents, if you were not here and they did not have your financial support,” states Lynnette Finklea, agent with American Family Insurance.
The need for life insurance varies with the level of responsibility of the insured and the level of need of the dependents. Dependents could be children, aging parents, siblings or anyone who relies on your financial support. Below are a few examples. Is your situation close to any of these?
•Single parent with young children. A single parent is both the primary caregiver and sole financial supporter. Additionally, the dependents have a longtime horizon for needed financial support. This example is at the top level for needing life insurance, but unfortunately it is estimated that 40 percent of single parents do not have adequate life insurance coverage.
•Married with children or other dependents. The need will vary with the age of the children or dependents and the individual earning capacity of the two spouses. However, if one of the spouse dies prematurely, there is still a need for financial support for the surviving spouse and the children.
•Married with no dependents. The need will vary with the age and earning capacity of the surviving spouse, the couple’s lifestyle costs and the level of current indebtedness.
•Retired with no dependents. The life insurance needs may be minimal and needed to cover funeral and final expenses and any debts. Depending on the size and complexity of the estate, life insurance may be needed to provide liquidity while the estate is being settled.
•Single with no dependents. Life insurance needs are minimal and needed only to cover funeral and final expenses and any debts.
•Business owner. Life insurance can be used to protect the livelihood of the business in the event of death of the owner. For example, the owner can be insured with “key person” insurance, with the proceeds payable to the business to provide the business flexibility to hire a replacement or work out other arrangements with the deceased owner’s family.
How Much Life Insurance do You Need?
The amount and type of life insurance you will need depends on how much money your dependents will need as an income stream in the future. The key is to buy enough life insurance, that when added to your other assets and invested conservatively, will provide sufficient income to replace the portion of your salary used to support your dependents.
Work with your financial planner and life insurance agent to determine the type and amount of coverage that you need. Most employers provide group life insurance with the option to purchase additional coverage at favorable rates. A couple of websites that might be helpful for general information are www.lifehappens.org and www.moneycentral.msn.com.
(Michael G. Shinn, CFP, registered representative of and securities and investment advisory services offered through Financial Network Investment Corp., member SIPC. Visit www.shinnfinancial.com for more information or to send your comments or questions to firstname.lastname@example.org. The websites listed are provided as a courtesy and are not under the control of Financial Network Investment Corp.)