How Much Insurance Do You Need?

Only YOU Can Give the Definitive Answer

Shopping for insurance isn’t always an easy task. It seems everyone has a different idea or recommendation that’s “just right” for you. But how do they know it’s just right for your particular situation?

Do you even know how much insurance fits your needs?

If you’re getting numbers thrown at you by an agent who hasn’t asked much more than your name and telephone number, give some thought to showing that person to the door. He or she does not have your best interest in mind. A reputable, experienced and knowledgeable agent will insist on spending some time with you, gathering all the information you can provide, before making any assessment of your insurance needs.

In the insurance business, this process is called risk assessment. Each person’s goals and comfort levels are different, and you are better off avoiding agent who has a stock answer for every question you ask. You are unique and your insurance coverage should be too.

Here are some questions you agent should ask before he or she helps you decide how much insurance is adequate to meet your needs.

• What are your concerns?
• What do you want from your savings and accumulation vehicles?
• What are your goals?
• What is your risk tolerance?
• How concerned are you about having the liquidity to meet emergencies and opportunities?

Only by considering those questions can your agent – and you – begin to decide what is right for you.

One reason life insurance has historically been a popular financial tool is that when you own life insurance, you own a valuable asset. Permanent life can provide a guaranteed, reasonable rate of return, freedom from reinvestment worries, and the right to borrow against your policy’s cash value and repay it at your own convenience. Most important, to many people, life insurance can give your beneficiaries financial security if you are no longer here to provide it yourself, offering preferred tax benefits and a continues income for your survivors.

But how much is enough?

Ask yourself these additional questions:

• Do you want to use your policy strictly as a death benefit or to help fund your retirement?
• Will it be part of a small or large estate?
• Will it be used for business purposes such as protecting key employees or for protecting your family?

A general rule of thumb used to be that a young person needed five times his annual salary in life insurance coverage. But that’s assuming you’re like everyone else. That’s assuming your eight kids don’t go to Harvard. What happens after five years of salary are extended?

When figuring how much benefit you need, including the usual suspects:

• Will your pension take care of you and your spouse’s needs?
• Will Social Security?
• What if you’re no longer here to provide for your family, what kind of expenses will they face?
• Will your spouse work?
• What other insurance do you have?
• Will your children be able to attend the college or university of their choice?
• How much money will Uncle Same demand?
• How much will today’s money be worth tomorrow?
• Did you just take out a $500,00 business loan that will – or should – be paid off in a few years?

Once you’ve determined how much insurance is enough, there are different kinds of life insurance to consider.

Term Insurance, which provides the only death benefit, may just what you need to protect against loss in this temporary situation. But term insurance, which becomes more expensive as you age, might not make as much sense for needs which require protection 30 years down the road.

Permanent Life Insurance, on the other hand, can double as both death benefit and retirement income. It can be converted to a lifetime annuity for you and your survivors, or be used for emergency funds during your lifetime.

Other forms of “permanent” insurance include Universal Life, which provides flexible premiums and death benefits, and which is designed to protect against changing business and personal needs.

With Universal Life, premiums can be skipped when cash flow is low and made up later when money is more plentiful, providing minimum funds are kept in the policy to cover monthly expenses. The death benefit can also be adjusted, depending on individual needs. Increases in coverage may require evidence of insurability, but this can be protected as well through the use of riders on the policy.

Finally, ask yourself whether you need life insurance at all.

People without heirs, business interests, or charitable interest, might not be interested. Or, perhaps you have so much money that it doesn’t matter how much of your estate is taxed when you die. But most of us do care about estate taxes, and we do need insurance. The key is determining how much we need and the fining a reputable agent – and company – to help meet that need.