How to begin thinking about Life insurance?
Given today’s lifestyle where everything costs money (where there’s going to be no third person to help you out); if you are the breadwinner it absolutely vital that you sit and think about how to protect your family in the event of your death. Death and its aftermath are not exactly topics that you can enjoy discussing around a cheerful fireside. But that does not negate its value in the big picture. There are several factors that the client needs to analyze and examine before deciding on an appropriate life insurance. This is a brief run through of what makes it important that bread winners insure their families:
- School and college expenses have skyrocketed. Right from kindergarten to university, good education does not come cheap. If your death occurs when you have children in school or college, lack of funds might mean a discontinuation of education for them.
- Families live independent lives due to changing emotional needs and financial compulsions. The golden days of sharing, caring and adjusting are now extinct. In those days, you had large families where you had several members involved in a business or farming. In the foreseen event of a death in the family, the bereaved members would be absorbed in a larger network that would care for them. As a matter of fact, life insurance was born when these protective institutions started dying out.
- Funeral expenses are very high. Average costs are pegged at as much as 7000USD. So opting for life insurance ensures that your family does not struggle with your funeral expenses.
- Life insurance funds are almost always exempt from federal taxes. This makes it a more attractive way to save money for loved ones.
- Many life insurance policies offer attractive incentives to use life insurance as a saving platform. The policies allow flexible saving options to clients (though they do not offer the best returns on your investment).
The client needs to sit down and examine the situations where life insurance funds would be useful in the future. To make this list as accurate as possible, the client needs to write down every current and future expense that will help calculate the full amount needed eventually.
Planning a baby?
- If the couple is planning a child in the near future, they would to take into account all the related expenses of child rearing from childcare to transportation to university – and a horde of other expenses too. If only one spouse is working to earn, then the other one would depend entirely on the life insurance policy to meet the immediate expenses that will arise. As far as single parents are concerned, taking out a life insurance policy becomes vitally important as the child or children are completely dependant on the parent for all their needs.
Paying a mortgage?
- If the breadwinner is paying off a home mortgage, then the life insurance amount in the policy should be adequate to cover the mortgage payments every month instead of forcing the family to move somewhere cheaper and make compromises in their standard of living.
Planning to get married?
- In the case of an unforeseen death in a home where there are is a married couple, the life insurance policy must be able to cover funeral expenses, loan payments, mortgage payments and credit card payments so that the bereaved spouse does not find herself in a financial bind soon after.
The retirement scenario:
- If retirement is around the corner, life insurance plays a vital role in ensuring the well-being of your spouse in the case of your death. Even if children are well- settled and your mortgage is paid off, it is necessary to calculate and gauge if your life insurance is enough to take care of your spouse for the next 20 years or more. So it is a good idea to rework your financial needs when you retire.
University or college education:
If you have children who will be going on to university or college, you will need a life insurance policy amount that allows you to pay for this as a college education can be very expensive and will almost be unaffordable if your insurance does not take care of it.
How much is enough?
The following tips to help you calculate the final amount that you’re looking at:
- Write down all your current expenses. These would include loan payments, monthly living expenses (food, rent, clothing, holidays, electricity, water), mortgage payments, transport expenses, car loans etc.
- Now write anticipated expenses like planning a child, college education, retirement expenses, funeral expenses, a possible job change etc.
- Add up all current and future expenses and arrive at the final figure. Add a 10% correction amount to keep a buffer in case you missed on something. Take this as (a).
- Now make a list of all incomes, including spouse’s income, any interest on dividends, rents from properties, checks from shares and stocks etc. Add to make a final figure. Take this as (b).
- The differential between these two amounts (a) and (b) tells you the amount that life insurance should take care of.
Tools to help you calculate the correct amount:
40 percent of Americans are underinsured and admit their life insurance policies provide inadequate coverage. Being underinsured is nearly as bad as having no insurance at all. Online life insurance calculators can also help you get an idea of the amount you’re looking at but the best option is to consult a professional life insurance agent. They are qualified and trained to help you assess your financial situation in detail and with a higher degree of accuracy than you could do by yourself. The final amount should take into account every possible expense that may arise later. It’s best to be pessimistic when listing expenses so that you err on the side of caution.
