Tip: Final Cost. Paying for a funeral can be a financial burden on a family. Make sure your estate management will provide them with sufficient funds to cover this important cost.
If you have a family who relies on your income, it’s critical to consider having enough life insurance to provide for them after you pass away. But too often, life insurance is an overlooked aspect of personal finances.
In fact, 30% of U.S. households say they have no life insurance coverage at all, according to a study conducted by LIMRA, which closely follows life insurance trends. By contrast, in 2004, only 22% of households reported having no life insurance.1
Recognizing the role life insurance can play in your family finances is an important first step. A critical second step is determining how much life insurance you may need.
Rule of Thumb
One widely followed rule of thumb for estimating a person’s insurance needs is based on income. Some will say a person needs a life insurance policy that is five times his or her annual income. Others recommend up to ten times annual income.
But if you are looking for a more accurate estimate, consider completing a “DNA test.” A DNA test is a Detailed Needs Analysis that takes into account a wide range of financial commitments to help better estimate insurance needs.
The first step is to add up needs and obligations.
Short-term needs
Which funds will need to be available for final expenses, such as a funeral, final medical bills, and any outstanding debts, such as credit cards or personal loans? How much to make available for short-term needs will depend on your individual situation.
Long-Term Needs
How much will it cost to maintain your family’s standard of living? How much is spent on necessities like housing, food, and clothing? Also, consider factoring in expenses such as travel and entertainment. Answering the question, “What would it cost a year to maintain this life style?” is good place to start.
New Obligations
What additional expenses may arise in the future? What family consideration will need to be addressed, especially if there are young children? Will aging parents need some kind of support? How about college costs? Factoring in potential new obligations allows for a more accurate picture of ongoing financial needs.
Next, subtract all current assets available.
Fast Fact: Need More. 58 million American households — half of all households in the country — reported they need more life insurance.
Source: LIMRA, 2010
Liquid Assets
Any assets that can be redeemed quickly and for a predictable price are considered liquid. Generally, houses and cars are not considered liquid assets since they may require time to sell the asset. Also, remember selling a home or a car may adjust a family’s current standard of living.
Your Life Insurance Need
Needs and obligations — minus liquid assets — can help you get a better idea about the amount of life insurance coverage you may need. And while this exercise is a good start to understanding your insurance needs, a more detailed review may be necessary to better assess your situation.
- LIMRA, 2010
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by Faulkner Media Group to provide information on a topic that may be of interest. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2011 Faulkner Media Group.