When people talk to us about life insurance, they usually have two questions: What kind of life insurance do I need and how much coverage do I need? There are certainly a lot of factors to consider and we’d be happy to talk to you about these decisions, but in the meantime, here are a few “short answers” to help you think things through.
What kind of life insurance do I need?
As a rule of thumb, buy term insurance to cover temporary needs and permanent insurance to cover permanent needs. For a family, the bulk of your coverage should be term, a long enough term to carry your children through their college years, and then drop it. Buy enough permanent insurance – when you can afford to – to provide for the needs that will be with you for the rest of your life (cover debts, estate taxes, supplement pension, etc.) Permanent insurance includes such products as whole life, universal life, and variable life.
For business, think of the reasons why you need the coverage and how long that coverage should last. This will help to determine the type of coverage you need.
How much life insurance do I need?
Use the following worksheet to arrive at an appropriate amount:
Residence mortgage – balance _____________
Other mortgages & liabilities _____________
Final expense fund $15,000.00
Emergency fund (3-6 mos. income) _____________
Education fund _____________
Income needs (amount needed to supplement a survivor’s income, remembering that the mortgage would be taken care of and there would be education and emergency funds. Consider childcare expenses.
Annual Supplement Need* _____________
Capital needed to provide income _____________
*Assuming 6% after-tax return, the amount of principal needed to provide $1000 of annual income: 15 years $9,712 20 year $11,470
(Capital need + cash needs total) – current coverage = total life insurance needs