How much life insurance do you need?

The primary reason for buying life insurance is to allow the family members of the deceased to continue with their lives free from the financial burdens that death can bring. Income can be made available for the surviving spouse. Insurance proceeds can safeguard home ownership. College or other educational plans can remain intact. The bottom line? Your life insurance is for your loved ones, not for yourself.

What Needs Must Be Met?
Financial losses that arise from dying too soon include expenditures for final expenses; the lost income of the deceased; and funds for a readjustment period, debt repayment, and education for children.

Final-Expense Needs 

Final expenses are one-time expenses occurring just prior to or after a death. Probably the largest of these expenses is for the funeral and burial of the deceased, which often cost more than $10,000. Travel expenses for family members to provide emotional support and to attend a funeral can be quite high as can food and lodging expenses for mourners. Severe and costly disruptions of family life can last as long as a month or more. These final expenses are one area of financial loss that is common topeople of all ages. Nonetheless, they may not indicate a need for life insurance if existing assets are sufficient.

Income-Replacement Needs 

Once someone else becomes financially dependent on you, your lost income will be the major financial loss resulting from your premature death. Included in this lost income is the value of any essential employee benefits, such as health plan benefits for your dependents. Dual-earner families depend on both incomes to maintain the desired level of living and should protect both sources of income.

Readjustment-Period Needs 

Families often need a period of readjustment after the death of a loved one. This period may last for a few years and may have financial consequences that require substantial life insurance proceeds. For example, the death of a parent with young children may require the surviving spouse to forgo employment for a while. Similarly, a surviving  employed spouse may need to take time off from a job to obtain further education.

Debt-Repayment Needs 

Many people expect life insurance proceeds to pay off installment loans, personal loans, and the outstanding balance on the home mortgage if a family income provider dies. Actually, a family that has provided adequately for the replacement of lost income probably will not need to make specific insurance provisions for the repayment of debts. It is sometimes helpful, however, to create a plan to pay off all debts other than the mortgage for no other reason than to simplify the financial lives of the survivors. Mortgage debt that was adequately being covered before death will continue to be covered if sufficient life insurance was purchased to replace lost income

College-Expense Needs 

Many families with small children already have a college savings plan in place. Adequate replacement of lost income should allow for continuation of the plan. Because most families will also use current income to handle expenses when the children are in college, the death of a familyincome provider may, therefore, impede the ability to meet thisneed. The solution: Earmark a dollar amount of life insurance proceeds for future college expenses.

Other Special Needs

 Many families have special needs that must be considered in the life insurance planning process. A family with a disabled child might have special needs if that child is likely to require medical or custodial care as an adult.

Government Benefits Can Reduce the Level of Need

 Widows, widowers, and their dependents may qualify for various government benefits most notably Social Security survivor’s benefits, which are paid to a surviving spouse and children. The level of benefits depends on income earned during the lifetime of the deceased that was subject to Social Security taxes. (Details on estimating Social Security benefits are provided in Appendix B and on the Garman/Forgue website.) If eligible, a family can receive as much as $25,000 per year, but these benefits generally cease when the youngest child reaches age 18.

Existing Insurance and Assets Reduce the Level of Need

 Employers often provide life insurance to their employees as an employee benefit. In addition, many people have existing life insurance that was purchased for them as children or that they purchased previously. These coverages can reduce the need for additional  life insurance purchases.As time passes, individuals and families usually acquire at least a minimal amount of savings and investments. The funds held in savings accounts, certificates of deposit, stocks, bonds, and mutual funds often are specifically earmarked for some special goal, such as retirement, travel, or college for children. In the event of a premature death, they could be used to pay final and readjustment expenses as well as to replace lost income, even though it might be wiser to retain these funds for their originally intended purpose. Pension funds and retirement plans of the deceased, such as 401(k) plans and IRAs , may be viewed as resources. Younger families should be wary of using retirement money for living expenses after the death of an income provider, however, as this strategy may jeopardize the surviving spouse’s retirement.

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