Life insurance isn’t something most people want to think about, but it’s incredibly important if you have a family that depends on you for financial support. Once you’re gone, that source of income is also gone. That’s why planning for your family’s future in the event of your death could be the most important thing you do.
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Life insurance can cover funeral costs, replace lost income and pay for things such as your child’s college education. There are several factors that determine how much life insurance you need to carry to cover your family:
- Funeral costs – Average burial costs range from $8,000 to over $10,000. In addition, there may also be unmet medical expenses that are incurred towards the end of your life, as well as probate costs or taxes on your assets upon your death. Figure out how much coverage you will need to take care of these expenses first.
- How much of your income will need to be replaced – Consider how long your family would need to continue receiving your income in order to make ends meet if you were to die today. Do you want your family to receive this income until your children finish their education, until your spouse retires, gets a new job, or dies? Make a plan that includes these key events and then determine how much money will be needed to meet these goals.
- How much annual income will your survivors need – Your family may not need your entire income to survive if you die. Look at your monthly expenses and create of budget of how much is needed to get by. Buy enough insurance to cover these costs or to supplement the income of your spouse.
- Figure out any additional expenses you want covered – These expenses could include the cost of a college education for your children or paying for a child’s wedding, new car, home, etc. These are all big ticket items and will add greatly to the amount of coverage you will need. Take an honest look at which expenses you have for each individual child or for your spouse.
Your life insurance agent will most likely ask you all of these questions when selling you a policy. It’s important to answer them as truthfully as possible in order to get the proper coverage. The amount of time you estimate before your demise or the number of years you need coverage after your death will make the biggest difference in your costs and coverage.
To compute the return on your life insurance investment between now and the time that the money would actually be needed, most companies will assume about a 2.5 percent return for horizons of five years or less, a 4 percent return for horizons of six to 10 years, and a 6 percent return for horizons greater than 10 years. These returns are then adjusted for inflation. Actual results may differ depending upon the level of inflation and investment performance.
The entire process isn’t as complex as it may sound, and an experienced agent can guide you through everything. Once you have completed the planning stage and purchased a policy, you’ll sleep better at night with the confidence that your family’s future is well taken care of. You cannot ask for a better peace of mind than that.
