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Determining Your Life
Insurance Coverage Needs
Like auto insurance coverage, it is
sometimes difficult to see the true value of life insurance coverage until
you actually need it. In the meantime, the only way you will feel
comfortable with your life insurance policy is if you understand, and agree
with, the reasons you bought it in the first place.
There are many reasons for an individual to own life insurance coverage.
Perhaps the most compelling reason is to purchase a death benefit which will
provide for the financial needs of their survivors.
Determining how much life insurance coverage you need is a four step
process:
Determine total short term needs in the event of your untimely death
Determine total long term needs in the event of your untimely death
Determine total resources available to family members
Provide insurance coverage for any remaining shortfall
Determining Your Total Short Term Needs
Short term needs are financial obligations and/or expenses arising within
six months of death. Examples of short term needs include expenses you pay
now such as:
loan balances (automobile loans, etc)
outstanding credit balances (credit cards, revolving lines of credit, etc)
mortgages (first mortgage, second mortgage, equity loans)
Add to these current expenses any death-related expenses which must be paid
in the short term:
funeral expenses
final medical costs
estate settlement costs
estate taxes due
charitable bequests you would like to make at death
And if you don't already have one, your survivors should be left with a
liquid emergency fund sufficient to get them through any unexpected
financial needs, perhaps six months worth of living expenses.
Determining Your Total Long Term Needs
In addition to covering your survivors' short term needs, some level of
monthly income will be needed to maintain their standard of living and meet
financial goals you have made together. These long term income needs
include:
a future income stream to cover standard of living items (we recommend that
you identify several time periods with unique needs such as while kids are
in home, when kids are gone, and your spouse's retirement years.)
college expenses that you would like to cover for your dependents
elderly care expenses you plan on contributing for relatives
monetary support for a disabled dependent
mortgages (first mortgage, second mortgage, equity loans)
child care costs if your spouse will work after your death
The value of these future obligations is discounted back to present value
amounts. This gives us a single dollar amount which, if invested, could
provide funds for all of your long term goals.
Calculating Your Total Available Resources
At this point, we have a pretty good idea of what your total cash need would
be in the event of your untimely death. With any luck, you have already
begun to set money aside to cover some of these costs, and the government
has a plan to help you as well.
Estimated earned income of your survivor(s)
Survivor Social Security benefit (continues while you have children under
the age of 17)
Retirement Social Security benefit (begins approximately when your spouse
turns 65)
Survivor benefits from your pension plan
The value of these future resources is discounted back to present value
amounts. This gives us a single dollar amount which we can use to offset
your total needs.
Providing Funds To Cover A Shortfall
When we compare our total needs to our total resources, most of us will find
a shortfall. A shortfall situation means that our survivors will be left
with the choice of either finding additional resources that we have not been
able to identify, or do without many of the financial needs that you hope to
cover.
Life insurance is uniquely suited for covering such a shortfall. It is a
means of sharing the financial risk of premature death with many, many
others who have similar concerns.
You pay a relatively small premium to an insurance company in exchange for
their promise to pay your beneficiaries a specified death benefit in the
event of your death. A financial need that arises from your death can be
eliminated by a financial resource that is created upon your death.
Factors To Consider When Selecting Life Insurance
In an ideal world, we would each carry sufficient life insurance to continue
to provide a lifestyle for our survivors similar to what they enjoy now,
with us here. We cannot always afford to fully cover our survivor needs,
particularly in our early years.
However, life insurance comes in many shapes and sizes. By carefully
considering the type and amount of life insurance that best meets your needs
you can ensure that you have provided for your family's monetary needs, even
if you are not here to do the providing.
Advisory Services offered through
Envision Investment Advisors, LLC., An SEC Registered Investment Advisory Firm.
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Life Coverage 
