This calculator will help you estimate approximately what benefits survivors may need in case of death.
The purpose of life insurance is to replace your income if you pass away, so that your dependents can sustain their current standard of living. Besides helping to support your family members, it can provide immediate cash at the time of death. Proceeds can help pay for funeral expenses, the deceased's debts, estate taxes and provide much needed income.
Before we get go any further, we want to address the most frequently asked question, which is "Do I really need life insurance?" The answer is "yes" if you're not independently wealthy and if you have dependents to protect. If your answer is yes, determining your requirements comes next and it's actually a lot easier than it seems. All you have to do is to get clear about your financial situation, what risks must be mitigated and the following information will help.
If you're considering purchasing any type of insurance, you first need to determine exactly why you're buying it and select the best type of policy for your specific needs. The process of choosing from the available options is fairly straightforward. For instance, if your primary concern is protecting your family against the loss of your income, you'll want to consider term insurance. On the other hand, if you want to protect your dependants against estate taxes or the failing of your business after your death, universal or whole life insurance should be considered.
To determine the immediate needs of your dependants you'll have to figure out what assets will be available should something happen to you. Following your death, how long will it take before your inheritors have access to your property? If the majority of your property will avoid probate, there probably isn't a need for life insurance for short term expenses, unless you don't have any cash assets, securities and/or bank accounts. On the other hand, if the majority of your property is transferred via a will, chances are good that it could be tied up in probate for months. If this is the case, your dependents may need ready cash, which a life insurance policy can provide. While in most cases probate court promptly authorizes a family allowance accessible by a spouse or inheritor, having an insurance policy gives your family what will probably be a much needed safety net.
Assets that can quickly be converted to cash are referred to as "liquid." If the majority of your estate includes jewelry, a small business, collectibles or real estate (all non-liquid assets), there could be a substantial financial loss if they are sold quickly to raise funds to pay expenses, compared to what they could be sold for down the road if there had been a sufficient liquid income from an insurance policy or other assets to pay any pressing bills.
Death is a stressful for families to deal with. Any short term cushion can have a long term positive impact on the health of the family. Some forms of social "safety net" programs in the healthcare field asset strip consumers who were unaware of the cost of mounting medical bills in their final days and that the home may be seized to recoup costs.
Determining the long term needs of your dependants can be challenging. You'll need to consider how long it may take for your dependents to become self sufficient. For example, if your children will soon be out of college, they probably won't require a lot of additional income. If you have young children and a stay at home spouse, your spouse should be able to get a job at some point and your children might be able to take get scholarships.
You should also consider how much money your dependents will need for living expenses. One method to determine this amount is to consider the earned income that you provide your dependents with on a regular basis. Once you have this number, subtract the value of the property they'd inherit and any funds that are going to be made available from private insurance plans or public sources that are already providing coverage, including Social Security heirs and other dependents benefits that will more than likely be available, as well as any management or union pensions that come into play. In addition, subtract any alternative sources of income, like affluent grandparents who plan on providing for their grandchildren. Once you come up with the numbers, you may discover that your dependents may not require much additional income from life insurance. On the other hand, if you have young children, you might feel that it makes sense to purchase a cost effective amount.
Some term life policies incorporate the ability to convert to permanent life insurance, a policy you can retain for the rest of your life regardless of your health. While permanent life premiums are higher than term policies at the beginning, they typically remain level indefinitely.
When it comes to whole life or universal life insurance, the best reason to consider either isn’t the accumulating cash value, though that is one selling point. The real concern is whether you’ll need coverage beyond the age 65, when term premiums start to get expensive. Permanent insurance should be considered if you have to protect children with special needs who'll always require care or if you want to leave money to your children, a special charity, etc., that you don't feel you'll be able to afford without the help of an insurance policy.
There's no easy answer to how much coverage is enough. Many financial advisors feel that people should have enough insurance to cover 5 to 7 years of their salary. If you have significant debt or young children, you should increase your coverage so you'll have enough to replace at least 10 years of your salary. Things to consider include whether the surviving partner is going to have child care expenses, if the children will be on their own soon or if you have alternative assets that can be drawn on. These are just a few of several factors that come into play when it comes to deciding how much coverage you need.