Life Insurance Needs

The potential earning power of a wage earner is one of the greatest assets of a family. The main objective of life insurance is to protect the insured’s family and creditors against financial loss due to the death of the insured. With two income families, the analysis is just as significant for each spouse even though one may have higher current earnings.

The general "rule of thumb" for life insurance is six times earnings as a minimum. For example, if one earns $100,000 a year, it is recommended that life insurance should be $600,000. However, determining the best policy also requires an analysis of specific needs. Of course, such needs vary from family to family, but the following categories normally apply:

• Final lump sum expenses, funeral, and debt repayment
• Income for the family until the children are self-supporting
• Life income for the surviving spouse
• Special needs, such as education and business situations
• Retirement income needs.

Once the needs are identified and measured, the next step is to determine other sources of capital, income or benefits available. The difference between the family’s needs and the money available from other sources represents the amount of life insurance which is needed. After the amount of the life insurance need has been determined, an evaluation of what type of policy best suits one’s current financial situation can be made. Cash flow, other investments, and savings patterns will be factors in making this decision.

Permanent life insurance builds cash values that will grow even if the insured is disabled. Term life insurance offers the maximum amount of protection for the lowest initial outlay. If term insurance is indicated for all or part of the protection, it is very important to consider the conversion options if an individual wishes to change the policy at a later date. The scheduled premium increases and benefit reductions should be closely examined since they vary considerably between life insurance companies.