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Evaluating Life Insurance
Life insurance is a funny thing because if we buy it it means that we have accepted that we will eventually die. Not the brightest thing to look towards. However there is a piece of mind that sets in that in the case you do pass away your heirs will be taken care of. So I am going to go through a couple of rules of thumb to follow when buying Life Insurance.
Amount of Insurance Needed
There are few ways to evaluate how much you actually need. I like what is called the capital needs approach. Simply stated it calculates how much your heirs need by
1. How much the family would need to survive on.
2. Current living standard.
3. The amount it would need to cover to pay all debts, expenses, burial costs, taxes and other expenses that will be needed upon your death.
4. Capital required to fill needs such as sending kids to college, contributing to a charity or other types of special circumstances.
The Life Insurance industry has a somewhat simple rule, 8-12 times your yearly gross income. But to be safe calculate all your debt and taxes and then your income and special needs and you should get a pretty good idea of how much life insurance you should need.
Cash Flow Considerations
Different types of policies have different kind of premium modes that you can pay in. Term can be a level premium. Some cash value policies have a flexible premium that allow a “stop and go” payment where you can pay the premium and then stop for awhile and then pick back up. Some policies you can pay the whole policy upfront which can allow a person to take advantage of the tax-deferred internal build up of the policy. The point here is find a premium level that will fit into your overall spending plan.
Duration
Here are a couple of rules of thumb:
Buy term if the need lasts less than 10 years or between 10-15 years.
Buy some type of whole life if the need is longer than 15 years
Buy some type of whole life if the policy will probably be continued up to or beyond the insured’s age 55.
The main thing when picking a life insurance policy is that it meets your heir’s financial needs upon your death and that it fits into your spending plan while you are still around.