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Life insurance is much like death and taxes, buying life insurance isn’t particularly exciting or immediately rewarding, but it is an important element of a well thought out and coordinated financial plan. Most people are aware that they need life insurance but, in our experience, they also tend to wait until there is an important life event forces their hand, or make the reconsider their strategy. But, there are some serious benefits to buying insurance earlier, rather than later in life, especially if you have debt, are married or planning on marriage, have or are planning on starting a family, or you are a business owner.
The simplest insurance to purchase and understand is called term life insurance. With term life insurance, you pay an annual premium for the “term” of the policy (usually 20 years) and if you die within those 20 years, your beneficiary will collect the amount indicated by the policy. For example, let’s assume you purchase a $1 million, 20-year term policy and the premium is $600/year. Assuming you are current on your premium payment, if you die within the 20-year period, your beneficiary will receive $1 million, tax-free. There are many other kinds of life insurance products including whole and universal life that are more complex and can serve different purposes in your financial plan. For example, whole and universal life insurance can build value over time that you may be able to use to help reach your financial goals.
Why Do You Need Life Insurance? One of the most important question you should ask yourself when considering life insurance is: “Will someone in my life be adversely effected (from a financial standpoint) by my untimely death?
Ask yourself: “If I were to die tomorrow, who would be burdened with my debt?” If you own a home, a business, or have personal liabilities, someone else will become responsible for those liabilities (generally your next of kin). Therefore, your spouse, your parents or your siblings could end up having to pay your debts. If you have children – especially young ones – and are the primary breadwinner, you may be putting your entire family at financial risk.
How Much Insurance Do You Need? This is not an easy question to answer and everyone is different. It depends on many factors, including your age, your gender, your income, your financial plans, and many other issues that are unique to each individual. Generally, you should aim for 7-10 times your annual salary. For example, if you make $100,000/year, you should consider buying somewhere between $700,000 to $1,000,000 of insurance. However, if you have any of the considerations above – children, a family, lots of debt, or own a business – you may need significantly more.