Money Matters: How Much Life Insurance Do You Need?

Whether you're married or single, a parent, or without children, life insurance can play a key role in your financial plan. But millions of Americans have no life insurance coverage, and many may not have enough.

Appreciating the importance of having adequate life insurance is one step; assessing your own unique needs is another.

As a starting point, determine your net earnings after taxes as well as your routine living expenses. Other factors to include in your calculations are:

Any outstanding debt that you owe, such as a mortgage or education loans
Future college expenses for your children
Funeral and other uninsured medical costs
How much your surviving spouse would need to adequately fund a retirement nest egg

As a general rule, you may want life insurance to cover these expenses. While ensuring the financial security of loved ones is an important use of life insurance, there are other uses. One example is as part of an estate planning strategy designed to pass more wealth to future generations. Another might be to fund a special needs trust to provide continued care to a relative after you are gone.

Once you have an idea of the amount of coverage you need, the next step is to evaluate the type of policy that is appropriate for you. Policies can be term or permanent life. Term life is basic coverage and less expensive. A term policy provides coverage for a predetermined period of time. Premiums can increase at the end of the term and can become extremely expensive. Term policies build no cash value and benefits are only paid if you die.

Permanent life insurance combines a death benefit with a tax-deferred savings component. With permanent life insurance, as long as you continue to pay the premiums, you are able to lock in coverage at a level premium rate for the life of the contract. Part of that premium accrues as a tax-deferred cash value. Borrowing from the value may be permitted.

Reviewing your coverage can be a daunting task. This is an area where a financial advisor can help you assess your need and fit it in with your entire financial plan.

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