Buying life insurance could be one of the easiest things you'll do in your life. However, contemplating your own mortality-and trying to put a price tag on your "worth"- can be emotionally charged, and many people find it difficult to get the process started. But the consequences of not thinking about life insurance could be even worse. While every human being's life is priceless, there are real financial consequences when someone dies and leaves loved ones behind. Life insurance helps provide financial protection for your loved ones should the unimaginable happen, and helps ensure they will still have the life you want for them, no matter what.
Why Life Insurance Is Important
Should you die, how would those who depend on you survive financially? A life insurance death benefit can provide needed cash to help them maintain their lifestyle and provide financial stability. Besides helping to pay for any final costs or medical bills that might have accumulated, the death benefit can help pay the mortgage, take care of household expenses, or help ensure funds for a college education. It can also allow a grieving spouse to take the time he or she needs to mourn, without having to worry about needing to get back to work immediately in order to pay the bills.
Assessing How Much You Need
When purchasing insurance, how do you determine the monetary value that you bring to your family? There are no hard and fast rules for determining how much life insurance is enough, because no two families have exactly the same needs or resources.
For life insurance to cover your net worth, most experts suggest buying life insurance that's worth between 5 and 15 times your annual gross income, or alternatively, an amount up to your annual salary times the number of years before your youngest child is out of college (depending on other available income or resources). Life insurance calculators can help you assess your future worth-in other words, the financial loss your family would suffer if the unexpected were to occur. There are many calculators available and a life insurance agent can help you come up with the amount of insurance coverage that's appropriate for your needs.
"Full Economic Replacement" Approach
Another way to approach determining the monetary value you bring to your family is through the concept of "full economic replacement." Let's say you wanted to insure your car, home or possessions. Wouldn't you insure for the full amount that it would cost to replace that object or possession? Doesn't it make sense to insure your life the same way?
Instead of trying to "guesstimate" how much coverage you would need now and throughout your life expectancy, the concept of "full economic replacement" encourages applying for the maximum coverage an insurer will issue based on their underwriting rules. Such an approach provides your loved ones with even greater financial protection than they would receive through traditional "needs-based" methods.* In addition, the "maximum coverage" determined by the insurer's underwriting department is based not just on your income or assets.
The objective of approaching life insurance coverage in this manner is the "full economic replacement" of the insured's entire life.
Estimated Future Costs
Additionally, you may need to consider factors that will affect your family's cost of living in the future. For instance, technological change significantly impacts monetary needs and expenditures. Products, jobs and services may move toward obsolescence, requiring capital outlay in various forms-additional educational expenses, medical care, etc. Protecting your family against future expenses should be a factor in determining your ultimate coverage level. Your agent can work with you to determine how your policy can accommodate those costs.
Term or Permanent Insurance
There are two basic types of life insurance-term and permanent. When you are young, term insurance allows you to obtain crucial death benefit protection at a lower cost than permanent insurance. However, a term policy is only in force for a specific time and once it expires, you lose the death benefit. In addition, if you plan on renewing your policy for a number of years, the long-term costs could be expensive. Still, if the choice is between term coverage and the risk of no coverage at all, term is the better choice.
On the other hand, permanent life insurance provides coverage for your entire life, provided premiums are paid. Permanent life insurance also accumulates cash value tax-deferred. Should your need for the death benefit change, that cash value can be borrowed against for any reason, including to pay for a down payment on a home, help pay for children's education or provide income for retirement.** Unlike term, many permanent policies enable you to "lock in" the premium amount for the life of the policy.
Later in Life
Ultimately, your determination of what type of insurance to purchase should be based on the assumption that you are likely to need life insurance coverage for your entire life. While there may be a common perception that insurance needs will decrease once your children are grown and self-supporting, other needs often emerge. These needs may include a spouse, a child or close relative with special needs, estate planning or personal and business debts that have accumulated. Or, you may simply want to have the freedom to spend your nest egg while you're alive, and leave the life insurance to your beneficiaries.
Permanent life insurance can address these needs, term insurance cannot.
Don't Shy Away from This Decision
You may find that thinking about needing life insurance is unsettling. But the reality is that your family counts on you financially, as well as emotionally. If you were to pass away, would they be able to stay in their home, meet expenses, get an education? Find out what your individual insurance need is, and help ensure that your family will be taken care of, even if you can't be there to take care of them yourself.
New York Life:
The Company You Keep®
Since 1845, New York Life Insurance Company has been providing quality insurance products to individuals, families, and businesses. For 160 years, we have conducted our business around the central values of financial strength, integrity, and humanity-and have remained committed to being a mutual company, owned solely by our policyholders. This means that, regardless of the economy, our focus is fixed on just one objective: meeting the needs of our customers, now and far into the future. Talk to your New York Life agent today and find out why we are The Company You Keep®.
* This method does not take into consideration certain factors considered during a traditional "needs-based"
analysis, such as your existing assets and liabilities.
** Loans accrue interest and reduce the death benefit and cash value.
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