Insurance planning is a key component of risk management in financial planning. Life insurance is a financial tool that transfers the risk of financial loss from one party, the insured, to another party, the insurance carrier. When there is an insurance claim, the insurer restores the economic loss, in whole or in part. The purpose of life insurance is to allow your family members to pay the bills and live their lives as planned despite your absence.
There are three key questions when considering life insurance:
- How much do you need?
- How long should the coverage be in place?
- What is doable from a cash-flow perspective?
How Much Coverage
Standard formulas – like buying coverage equal to eight to 10 times your annual income – maybe inadequate today and tomorrow. The truth is that life insurance is a personal affair. Two couples may earn equal salaries, but it is not logical to say that someone with four young children should have the same coverage as empty nesters with no mortgage and a substantial retirement fund.
The right amount of coverage is directly related to the goals which you want accomplished at or after your death and the assets available to fund these goals. When a spouse dies, the survivor typically has to address items like medical bills that have incurred, but not covered by insurance, burial and funeral expenses, taxes, personal obligations, and unpaid pledges.
It also is important to design a life insurance policy to help the surviving family members with income for the first few years after the death of a spouse. This readjustment income is for a year or two and can provide a financial cushion. Done correctly, it provides surviving family members with income approximately equal to the family income before the death of a loved one.
In some situations, the surviving spouse needs life income. Life income differs from readjustment income as the life income is provided for a long duration whereas readjustment income is short-term in nature.
Finally, there are special needs which require attention after the death of a loved one. This would include things like paying off the mortgage, an educational fund, an emergency reserve fund and retirement needs. Additionally, should a qualifying extended care need arise (which could be catastrophic to a family’s financial well-being), life insurance offers a living benefit to protect assets of the critically ill insured’s family.
If you have questions about life insurance planning, please call
Kades-Margolis at (800) 433-1828, ext. 4, or click this link, fill out the form and submit. We will have one of our associates contact you.