Choosing the right type and amount of life insurance is vital to a sound financial plan, but is it right for you? According to the Insurance Information Institute (I.I.I.), there are two major types of life insurance: term and whole life. Term covers the policyholder for a specified period, usually from one to 30 years. Whole life, sometimes called permanent life insurance, covers the policyholder for as long as they live – even if it’s to 100.
To assess your insurance needs, the Insurance Information Institute (I.I.I.) suggests asking yourself the following five questions.
1. Does anyone depend on me for financial support?
Whether it’s a spouse or domestic partner, children, grandchildren, or even aging parents, you’ll want to make sure they’re left financially secure. Purchase enough life insurance to replace your income while also financing the expenses your beneficiaries will incur to replace services you provide within the household (e.g., landscaping, tax preparation). Stay-at-home parents, and those caring full-time for an adult family member, should also consider purchasing life insurance to allow for hiring professionals to undertake these tasks.
Your family may have other sources of income, such as Social Security survivor benefits, but this is rarely enough, particularly if you have children under 18 and want to fund their education.
2. Are my retirement and other savings alone enough to support my dependents?
Unless your savings and retirement benefits are substantial, the income they generate is unlikely to be enough to pay for the housing, education and other day-to-day needs of your financial dependents. Remember, they will also have to take on the cost of replacing your employer-provided benefits, such as health insurance premium payments and retirement contributions.
3. Will estate and inheritance taxes significantly reduce the amount my dependents receive?
Even if you are leaving a considerable inheritance, don’t assume that will be enough. Consult with your financial advisor or an insurance professional on how your tax situation impacts the type and amount of life insurance you should purchase.
4. What is my plan for covering final expenses?
Whether or not you have dependents, you’ll want to be able to cover the expenses incurred by funeral related costs, outstanding taxes and debts, and the administrative fees associated with “winding up” an estate. These expenses can total upwards of $15,000, and can be defrayed by having the right life insurance policy in place.
5. Will I be able to leave a donation to my favorite charity?
A beneficiary does not necessarily have to be a loved one; it can be a much-loved cause. If you have a favorite charity, foundation, museum, etc, you can use a life insurance vehicle to leave the organization a more sizable donation than you might have otherwise.
Published with permission from RISMedia.