Life insurance is a special asset that can be used to solve some of life’s unique financial problems – namely to bridge the gap that exists between your financial needs and wants and your current assets. Some common reasons for purchasing life insurance as related to personal needs are:
-
Pay for final expenses – funeral costs, death taxes and other estate settlement costs
-
Pay off a mortgage
-
Educational and child-care expenses
-
Replace the loss of an income
-
Create an emergency fund
-
Pay off loans
Average funeral costs can range from $5,000 to $7,000 and can be higher. Depending on the age of your children, multiple expenses must be considered: will the surviving spouse go back to work, the age of the children and how will college expenses be paid. While estimating the cost of replacing an income can be complicated, the most basic rule of thumb is that you need life insurance between five and ten times your salary. In choosing the type of policy you purchase, consideration must be given to the type of need the policy is going to cover; for example, a short term need to cover a 10-year mortgage or a long term need like final expenses. Lastly inflation, while currently low, needs to be taken into account. For example, a $100,000 policy purchased today will need to be worth $148,000 to cover the same obligations 10 years from now, assuming 4% inflation for 10 years.
