“A man’s treatment of money is the most decisive test of his character–how he makes it and how he spends it.” — James Moffatt
Once you have established that you need life insurance coverage, the next step is to determine how much your death benefit should be. The higher the amount of the death benefit, the higher the premium you will pay. To get an adequate amount of coverage at the best possible price, you want to estimate your death benefit needs based on a sensible criteria.
Depending on who you ask, the methods for determining the appropriate death benefit vary. Usually it is recommended that the yearly income seeking to be replaced is multiplied by a factor. Some recommend 8-10 times the amount of yearly income required to replace the income of the insured. Others recommend that you choose an amount that if invested conservatively would provide a continual income for as long as it is needed.
As an example, let’s assume that you contribute $50,000.00 per year in income or services to your household. If you were to die, let us further assume it would take approximately $50,000.00 per year to compensate for the financial hardship your loss creates. Deciding on the correct amount of coverage for that situation would require you deciding how many years after your death your lost contribution would need to continue.
If we assume that the financial hardship created by your loss would only last 10 years after your death, then you would multiply $50,000.00 by 10 to arrive $500,000.00 as an adequate death benefit. In a situation where the financial hardship would last for the life of the beneficiary, a death benefit amount should be selected that if invested at a conservative rate of interest would yield a yearly return of $50,000.00. For example, a $500,000.00 death benefit invested at 10% would yield $50,000.00 per year.
“Our necessities are few but our wants are endless.” — Henry Wheeler Shaw (Josh Billings)
Do you want life insurance, or do you need it? That is a reasonable question you should ask yourself, and it is an essential question to answer, especially if you are trying to build your wealth on a limited budget. Spending thousands of dollars on unnecessary life insurance coverage can be detrimental to your wealth. It is estimated that as much as 30% of all life insurance policies are on the lives of single people with no dependents. Those people probably have no need for the insurance they are paying for.
The purpose of life insurance is to prevent a financial hardship that would be created if the insured person dies. Therefore, if your untimely death would create a financial hardship for another, be it a spouse, your children, or a dependent parent you need life insurance. If no hardship would be created for another by your death, you do not need life insurance, and your money would be better used to build your wealth now.
An important consideration when formulating your life insurance plan is to factor in the potential financial hardship that would be created by a loss of the services the insured person provides now. While a non-working spouse may not contribute a paycheck, replacing their service–child care, for example–could create a financial hardship on the surviving spouse.
“Those who plan do better than those who do not plan even though they rarely stick to their plan.” — Winston Churchill
It may sound obvious that you should create a life insurance plan, but it would surprise you how many people enter the life insurance buying process without a plan. Failing to create an adequate life insurance plan can cost you.
For example, if you are sold a policy with a $1,000,000.00 death benefit when a carefully thought out life insurance plan would have revealed that you only needed $500,000.00 of coverage, you would have spent significantly more than needed for adequate protection. That is money wasted on premiums that could have been used to invest, or used to enjoy your life now.
Another potential consequence of failing to plan is that, in the event of your untimely death, the proceeds from the policy could end up in probate court or end up being squandered away by beneficiaries unskilled in money matters–both costly symptoms of inadequate planning.
How do you create a life insurance plan? It’s not hard, but you will need to answer several questions, determine your needs based on the answers, and write it all down. Here are the basic questions you need to answer:
Do I need life insurance?
How much coverage is needed?
How long will the coverage be needed?
What kind of life insurance policy is needed?
Who should benefit from the policy?
To adequately answer the questions, you can apply the buying strategies I share with you in this blog to your own situation. How you answer each question will affect what you pay in premiums and ultimately how successful your life insurance plan will be at meeting your goals.
(From Medialink) - Lives change. Growing families often trade up to a bigger house. Someone with a pay raise might think of getting a better car. But, how many with changing circumstances think about the need to trade up to a better life insurance policy?
Turns out… not many.
That means a more difficult life for surviving family members. In fact, the Insurance Information Institute says that nearly half of surviving spouses would experience a 20 to 40% decline in their standard of living if the primary wage earner in the family died.
Life insurance is like money in the bank. And, like a retirement account, the equity can grow. It can be used for almost anything - to pay funeral expenses, debts, and to maintain a certain standard of living. September is National Insurance Month, the time each year to familiarize yourself with your policy and check if you’re adequately covered.
