Financial Wellness: Start talk about life insuranceIt’s a tricky question to answer, even before you throw in the unsettling issue of your own demise: How much life insurance do I need?
By: Sherri Richards, INFORUM
It’s a tricky question to answer, even before you throw in the unsettling issue of your own demise: How much life insurance do I need?
The answer: It depends.
And so much depends on coming up with the right amount, including your finances now (i.e., how much the policy will cost) as well as the financial well-being of your family if the worst happened.
Thankfully, there are good resources to help find the right answer for you.
Let’s start with an easy quiz offered by author and TV host Suze Orman (http://apps.suzeorman.com/suzequiz).
The online calculator breaks down the two major components that you need to think about when deciding on the right amount of life insurance: one-time obligations and replacement income.
First, think about how much income you’d like your beneficiaries to receive each year. Your goal would be to have a large enough insurance payment to generate that amount in interest when invested.
To figure out how much that is, divide the yearly amount you’d like your family to have by the interest rate you expect to earn. Orman’s quiz assumes a 4 percent return.
If I thought my beneficiaries would need $40,000 a year, I’d divide that amount by .04, which tells me I’d need $1 million.
If I assumed a higher interest rate, I’d need a smaller policy. With a lower interest rate, I’d need a larger benefit.
Then, you need to add in any additional one-time needs, things like funeral expenses, college tuition, remaining debt or charitable gifts.
While a good place to start, it’s not a perfect formula for everyone.
Single people who have no one dependent on them probably don’t need much life insurance, except to cover funeral costs and any debt that would linger posthumously. Someone who wants to leave a financial legacy would perhaps need more.
LifeHappens.org offers more personalized considerations. The nonprofit also offers a more extensive interactive planner.
In addition to the amount of insurance, you need to decide on the right type.
I said in last week’s column I’m generally not a fan of whole life policies. Orman goes further, on the record as “hating” them.
Some people like that whole life insurance is permanent, meaning you can’t age out of your plan like you can (and hopefully do) with term insurance. They also build cash value.
However, they cost far more than a term policy, and have high fees. Orman says you’re better off purchasing a term policy and investing the difference between that and the cost of a whole life plan.
“If you are smart with the money you have today and you get rid of your mortgages, car loans and credit card debt and put money into retirement plans, you don’t need insurance 30 years from now to protect your family when you die,” Orman writes.
Whichever plan and amount ends up being best for your situation, the important thing is to start thinking about life insurance, as difficult a topic as it may be.
Sherri Richards is a thrifty mom of two and Business editor at The Forum.
She can be reached at firstname.lastname@example.org