One of the most important questions that gets asked when helping people with life insurance is �how much life insurance do I really need?�
There are many variable to this topic and there is no one best method or formula. There are however a number of constants that most financial professions will look at. What I would like to do here is provide a guideline that will help you prepare for a meeting with an insurance agent or financial advisor. I will write a second part to this article that will show you a method to use this collected data to compute for yourself how much life insurance you might need.
In a nutshell the goal is to step back and envision the chain of events that will unfold after the death of a family member. Some people can begin the planning by having a firm idea of their goals and objectives. Many others, however, simply have a feeling that there is something needed. You can start your personal analysis by asking yourself:
�What is your most important goal for your family?
�What is your most important financial goal for your family?
�Where are you today on a time line to meet these goals.
Here are some starting points to help you collect the information that you will need.
�The first step is to take a financial snapshot of your present situation.
�Think of potential medical expenses that might not be covered by current health insurance.
�List your dependants and decide on your future goals of their needs.
�Choose an amount that is an adequate income for the family survivors.
�What is your tolerance for risk?
�Time frame for the need of this insurance.
We will look at each of these points one at a time so you will know what information needs to be gathered. Get a notebook and envelope to write down your findings and even make copies of documents with names and account numbers of supporting documents. Afterwards this should be saved in a bank box, fire safe or alternative safe location that can be used in the future in case of a death or disaster.
Financial Snapshot
How much money do you have and where is it held. Examples would be CD’s, money market or savings accounts or maybe stocks, bonds, mutual funds or annuities. What about real-estate such as your personal residence, a second home or investment property.
Now look to the other side of the picture and list everything that you owe. Credit card debt, mortgages, line of credit, car loans and school loans. An easy way to help you make this list is to collect all your bills and bank account statements over the past few months and see what accounts you have been paying off each month. Find out how much is left on each of these accounts. Record their purpose, account numbers and who’s names are on the accounts.
Final Medical Expenses
Your medical insurance will cover most of the situations that will come up. There are a few events that can pose a balance to what they will cover. What if death is not sudden. Experimental drugs might have been used in the event of a lingering illness. Long term care and nursing assistance might have been needed. Some of these can be covered with alternative insurance plans if not we will pick a figure at the end to potentially cover these needs.
Dependants
List your dependants and their birthdays. What are your goals for them? Do you wish to cover their schooling? For how long? Through how many years of college or trade school? What are the many costs of their present education. If it ends up that there would be only one parent, what would be the cost of day care or after school care to allow for a single parent to work.
Survivors income
What standard of living is your goal for the surviving family members. Do you wish them to stay in the same house and neighborhood or will they relocate where costs are different. If there is a move to different city or even live together with other family members the cost could be different.
Risk
What is your personal situation when it comes to risk taking. What is your investment expertise and tolerance for risk. Can you sleep at night not knowing where the stock market will be in the morning. Is all your money in a saving account for a reason.
Time Frame
How long do you wish this coverage. Is it to cover a specific loan or purpose that will only be needed for 5, 10 or 15 years? Is it just to cover the mortgage or only until the kids leave the house? Do you want it for ever even into your retirement age? Do you wish a cash value associated with the life insurance?
This article is designed to help you gather data to prepare for a visit with an Insurance agent or financial advisor. It is the first part in a series of articles that will include a specific form that can be used as a data collector and an article on how you might use this information to compute for yourself the important question of how much life insurance do you need.
Louis Hammer has a Masters of Finance from Willamette University and has helped clients as an insurance agent since 1986.
