Wednesday, February 5, 2014

The Facts About Life Insurance

For some people, obtaining life insurance is something that you do when you are older, when your children are grown. The thought of doing something so distinctly responsible can seem daunting for those who never think of the future. As we all know, life has a way of passing us by quickly, and when we most need something like life insurance it is too late.
Starting a life insurance policy should not be a scary task, as long as you go into it with a clear understanding of what kind of coverage that you need. Making sure that your loved ones are taken care of when you are gone is not the only reason for life insurance. It should be considered an investment, just like opening a 401k or buying a second home. The following article is helpful as it breaks down the different aspects of life insurance and what to consider before obtaining it.

Let's face the facts: life insurance does not get a lot of attention in our daily lives. It requires us to address a subject that many prefer to avoid -- our own mortality. Yet, for most people life insurance is important for building a sound financial plan, and it's something that shouldn't be ignored. September is Life Insurance Awareness Month, so my musings this month are devoted to this topic.
I've seen certain themes emerge based on countless discussions with my clients about life insurance. Some of them get tripped-up on which type of policy, term or cash value, is most appropriate for their situation. Others may have misconceptions about how much life insurance coverage is needed.
Invariably, over the course of any discussion, a light bulb goes on when clients are asked a very basic question: "How long would your family be secure financially if you were suddenly gone?"
Life insurance is often a taboo topic, even within families. A recent ING U.S. study found that close to half (45 percent) of married respondents have never or rarely talked about what would happen to the family finances if a spouse were to pass on. While this can be a sensitive issue, even between couples, there needs to be open communication. I am fortunate to be in a position to help facilitate these critical dialogues.
For those interested in securing life insurance coverage but having trouble getting started, here are some of the common questions I get from my clients, along with a few thoughts that may help guide you during the process.

1. How do I calculate how much I need?
 While seven to ten times your annual salary is a generally accepted rule-of-thumb for coverage, it's best to conduct your own personal needs analysis. Countless online calculators may give you a rough sense of your needs. Yet, I encourage you to dig deeper and consider the following variables, which, when added together, will get you closer to your real number. Consider final expenses, which are one-time costs such as for the funeral and burial. In addition, factor in outstanding debts that need to be paid off and readjustment expenses that arise during transition, such as shifts in child care, housing or medical insurance. Parents need to take into account dependency expenses to cover a family until all children are self-supporting, as well as education costs to help with college tuition for each child. Don't forget to properly insure a stay-at-home parent or someone working part-time; their unpaid contributions to the household could result in significant additional expenses if they were to die. A final variable to take into account is providing lifetime income to the surviving spouse.

2. Who else do I need to involve in this decision?
 Life insurance is not a stand-alone decision. It is a selfless act that protects the future of your family, yet can bring up difficult emotions. Anyone affected by the policy should be involved in conversations and understand the rationale behind the amount of coverage. It is often helpful to have the conversation after doing some homework about coverage options first -- whether that work is done through the workplace, a financial professional or independently. Your spouse or partner should be involved and additional family members may also need to be involved, particularly adult children or parents.
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