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07-24-2008 by Colleen King
Life insurance is one of those things that you don’t want to spend money on, right? If you’re like me, if you can’t eat it or wear it, I don’t really want to spend money on it. But do you really need it?
Keep in mind what life insurance is for. Growing up, I thought it was something your parents and grandparents bought in order to have something to leave to the remaining family. WRONG! View life insurance as ‘income replacement’–when you have people financially dependent on you, what happens to them if something dire happens to you? Whether it’s a spouse and children, elderly parents, a disabled sibling, what happens to their existence if they are fully or partially relying on your income?
Who doesn’t need it? Well, that’s debatable because even if you don’t have someone relying on you for some kind of financial support, should you pass away and leave large debts the proceeds from life insurance would be helpful. If you have family or friends that you would be leaving something large to, and the value exceeded the estate tax maximum, people often use term life insurance to pay for the tax liability.
A lot of times young people in their 20s with no assets, no house, no dependents will be sold a term policy. Do they need it? The industry is divided; most see life insurance as something you buy after you have something to protect. Others argue you should do it, because being younger, rates are lower and you are insurable. And you’ll probably get married, have kids and accumulate assets at some point, so you’ll need it anyway. Personally, I’ll do it when asked but I don’t actively pursue that market.
How much life insurance do you need? In your younger years, you tend to have more liabilities (like kids) so you need more. Basically, regardless of your situation there are a couple of ways to figure out the ‘how much’ question and you come close to the same amount. Depending on your income level, you can take your annual income and multiply it 5-15 times. OR, you can figure out your expenses on an annual basis, plus how much it would take to pay off the mortgage, $100,000+ per child for college, etc.
Here’s where your trusted agent comes in. A good agent will help you figure out the amount to shoot for then get quotes to see what the ‘ultimate’ amount is going to cost. If it comes back too high, then you adjust until you end up with a cost that is tolerable for your budget.
A little pre-planning can save your heirs a lot of heartache and keep them from having to make certain decisions when they are grieving. Be well!