Financial Planning for November 2006
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Life Insurance - How Much is Enough?
You are young, single, and carefree with no dependents. Do you need life insurance? Suppose you are married with two children - does that affect your life insurance needs?
If you are like most people, you probably said ’no’ to the first question and ‘yes’ to the second one. After all, a single person with no dependents doesn’t necessarily need to provide for anyone’s future support. On the other hand, if you’re married with children, you probably want your family to continue to live as well as they currently do. They will need assets, and the income they produce, in order to accomplish that goal.
The real answer to both questions is likely a "yes." If you have only yourself to support, you may not need a large life insurance policy, but it’s only fair to leave enough behind to pay your final expenses.
What to Consider
So how much insurance do you really need? That’s a question you and your financial advisor(s) need to answer after looking at all of the relevant facts. The purpose of this article is to give you a general idea of how to go about determining those insurance needs.
One of your first considerations is to provide for your final costs and the best place to do that is at a funeral home. Your estate may also have expenses associated with attorneys, appraisers, accountants and estate taxes, as well as the cost of maintaining your assets while the estate is being settled. Your financial advisor should be able to guide you in developing an estimate of these.
Next, you need to estimate the debts that you will leave. Typical debts include final credit card bills, home mortgages, other unsecured debt, and the many monthly utility and other household bills you pay each month. You may also want to consider unpaid income taxes, as well as debts secured by investment properties.
One of your major goals in providing for your family will be replacing your income. Losing a family member is devastating enough, but without adequate funds available to help your survivors maintain their present lifestyle - well, let’s just say that less stress than this has caused families to disintegrate. When considering what will be needed to replace your income, take into account what living expenses the family may incur. While some of them may decrease, health insurance and other medical costs could actually go up. Your spouse may incur higher costs for child care as well. Don’t assume that expenses will decrease when, in fact, they could well increase, especially when you consider inflation. You will receive some help in the form of Social Security Survivors Benefits, but these probably won’t come close to covering your family’s needs.
Once you have a handle on what your survivors will need, take a look at your current assets. Will these be enough to take care of your family? Do the assets produce amounts that will help ease the burden of losing your previous income? If needed, can the assets be liquidated to cover debt or keep the family going? Some assets are highly illiquid and need to be excluded from the picture when calculating your family’s ongoing support needs.
With all of the preceding information, you now have a basis to determine potential life insurance needs. Simply subtract expected resources from expected needs and the result is what will be needed to protect the family. You and your financial advisor will then be able to develop a plan to protect your loved ones that includes life insurance.
Resources
You could probably find numerous sites on the Internet that provide insurance need calculators. In addition, you might want to take a look at the following sites:These are just two of the many sites available and this article is not intended to recommend any one over another. Using an Internet calculator is just a starting point in deciding what you need. Once you have taken this step, you and your financial advisor need to work together to devise a plan that is right for you and your family.
Conclusion
Even though your death will be an end for you, you will most likely leave survivors who depended on you. It’s important now to devise a plan to take care of their needs if you are no longer in the picture. To be sure, there will be a trade-off between what you need and what you can reasonably afford, but providing your family with some measure of protection is one of your final obligations. Give us a call and let us help you develop a financial plan that will ease the burden on your family.
Have a great Thanksgiving.
If you are like most people, you probably said ’no’ to the first question and ‘yes’ to the second one. After all, a single person with no dependents doesn’t necessarily need to provide for anyone’s future support. On the other hand, if you’re married with children, you probably want your family to continue to live as well as they currently do. They will need assets, and the income they produce, in order to accomplish that goal.
The real answer to both questions is likely a "yes." If you have only yourself to support, you may not need a large life insurance policy, but it’s only fair to leave enough behind to pay your final expenses.
What to Consider
So how much insurance do you really need? That’s a question you and your financial advisor(s) need to answer after looking at all of the relevant facts. The purpose of this article is to give you a general idea of how to go about determining those insurance needs.
One of your first considerations is to provide for your final costs and the best place to do that is at a funeral home. Your estate may also have expenses associated with attorneys, appraisers, accountants and estate taxes, as well as the cost of maintaining your assets while the estate is being settled. Your financial advisor should be able to guide you in developing an estimate of these.
Next, you need to estimate the debts that you will leave. Typical debts include final credit card bills, home mortgages, other unsecured debt, and the many monthly utility and other household bills you pay each month. You may also want to consider unpaid income taxes, as well as debts secured by investment properties.
One of your major goals in providing for your family will be replacing your income. Losing a family member is devastating enough, but without adequate funds available to help your survivors maintain their present lifestyle - well, let’s just say that less stress than this has caused families to disintegrate. When considering what will be needed to replace your income, take into account what living expenses the family may incur. While some of them may decrease, health insurance and other medical costs could actually go up. Your spouse may incur higher costs for child care as well. Don’t assume that expenses will decrease when, in fact, they could well increase, especially when you consider inflation. You will receive some help in the form of Social Security Survivors Benefits, but these probably won’t come close to covering your family’s needs.
Once you have a handle on what your survivors will need, take a look at your current assets. Will these be enough to take care of your family? Do the assets produce amounts that will help ease the burden of losing your previous income? If needed, can the assets be liquidated to cover debt or keep the family going? Some assets are highly illiquid and need to be excluded from the picture when calculating your family’s ongoing support needs.
With all of the preceding information, you now have a basis to determine potential life insurance needs. Simply subtract expected resources from expected needs and the result is what will be needed to protect the family. You and your financial advisor will then be able to develop a plan to protect your loved ones that includes life insurance.
Resources
You could probably find numerous sites on the Internet that provide insurance need calculators. In addition, you might want to take a look at the following sites:These are just two of the many sites available and this article is not intended to recommend any one over another. Using an Internet calculator is just a starting point in deciding what you need. Once you have taken this step, you and your financial advisor need to work together to devise a plan that is right for you and your family.
Conclusion
Even though your death will be an end for you, you will most likely leave survivors who depended on you. It’s important now to devise a plan to take care of their needs if you are no longer in the picture. To be sure, there will be a trade-off between what you need and what you can reasonably afford, but providing your family with some measure of protection is one of your final obligations. Give us a call and let us help you develop a financial plan that will ease the burden on your family.
Have a great Thanksgiving.
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