If you were to die and your family faced the loss of both you and your income, would they be able to get by financially? Depending on your other financial resources, life insurance may be an important addition to a comprehensive financial plan.
Importance of Life Insurance
The need for life insurance is most important during your prime income earning and wealth building years. When a family loses a breadwinner, it isn’t just the lost income, but also 401K savings, contributions to investment accounts or college accounts, and possibly employer-provided health insurance. As you build your wealth the need for life insurance may decrease or even eventually disappear.
Why Do You Need Life Insurance?
Everyone has different needs when it comes to life insurance. One way of measuring the need for insurance is known as the “Family Needs Approach.” The American Institute of CPAs has provided a good review of this approach in an article which can be found here. The approach considers three different categories of financial needs.
1. Immediate Needs – Including estate taxes and paying off debt (if desired)
2. Ongoing Needs – Such as living needs which need to be funded in the absence of a decedent’s earnings
3. Specific Funding Needs – For example, college costs or charitable bequests
Once you total these needs you will know the total resources that are needed. You can then compare the total to your current savings and current life insurance, if any. This will provide an estimate of additional life insurance coverage to consider.
What Type of Insurance?
In addition to determining the right amount of life insurance, you will also need to decide the right type. There are several types of life insurance to choose from. Two of the most popular types are known as Whole Life Insurance (which can be permanent or very long term) and Term Life Insurance (which is generally issued for a defined period of years.) People may choose to combine theses types of policies in order to provide needed coverage during different times in their family’s lives.
Life Insurance products are very important and complex financial instruments, so you may want to turn to an insurance professional for advice and counsel, depending on your particular needs. But don’t let the complexity stop you from carefully considering your family’s needs.
Horizon Advisors does not sell insurance or represent any insurance carriers but we do think that people should carefully consider the protection and peace of mind that life insurance affords. If you have any questions about how life insurance fits into your financial plan please feel free to contact us.