Considering Life Insurance? Take a Detailed Needs Analysis
When purchasing life insurance, it's important to understand the financial needs of your beneficiaries before you choose a policy. Many individuals tend to think backwards when it comes to life insurance. They make critical decisions on the product they want, whether it’s permanent life insurance, basic term life insurance or even a combination of both, before thinking through the amount of protection they need. As such, you really need to first figure out how much life insurance you need before you even think about the product that would be most appropriate. A needs analysis can help you determine how much life insurance you should buy.
Consider Current and Future Expenses
A solid needs analysis will take into account immediate, ongoing, and future expenses. Immediate expenses comprise the total cost of a funeral and any outstanding medical bills. Instead of purchasing life insurance exclusively to replace income, individuals should consider whether they want their policy to allow their loved ones to pay off debts. Typically, people want their families to be in a position to pay for expenses when they die.
Ongoing and future expenses, on the other hand, may include sending your children to college. Consider whether your kids are likely to spend more time in school and seek advanced degrees. The more detailed you are about the cost of college, the better.
Decide how long your family would need support, and multiply your annual income by that figure. The multiplier, in this case, might be the total number of years it would take before your youngest child completes high school. Instead of planning life insurance as an isolated effort, consider buying it as part of an overall financial plan. Once this information is known, you can map the life insurance need on top of the plan. Keep in mind that the death benefit from life insurance is not taxable. This means that it can be a simple and versatile way to provide monetary support to loved ones left behind.
Calculate Your Number
To help determine the amount of life insurance to purchase, consider looking at your lifetime economic value. The formula is based on your answers to the following questions.
- How old are you?
- How much do you pay in taxes?
- How much do you earn before taxes?
- At what age are you planning to retire?
- What is the value per year of the chores you do such as mowing the lawn, chauffeuring kids, or whatever role that your survivors would have to pay someone else to do?
- How much do you receive in employee benefits, such as contributions to retirement savings?
- How much will your family need for things like clothing, food, and transportation?
Also, a needs analysis should consider how much income the death benefit from the life insurance policy is likely to bring if it’s invested. The decision of how much life insurance to purchase should be guided by how it will allow your family to live following your death.
Never Underestimate Needs
Most individuals underestimate the amount of life insurance they should purchase. For instance, if you received a salary of $5 million upfront, you’d look at that money differently and you’d protect it differently. Many are able to earn more than $5 million over the course of their career, but a higher percentage of this group doesn’t think in those terms when buying life insurance.
Do not skimp on your family’s protection. It’s better to pad your life insurance with too much coverage rather than too little. Keep in mind that your income will most likely increase over the years, and so will your expenses. While it’s hard to pinpoint how much these will rise , a cushion helps ensure your family members can maintain their lifestyle. To ensure that you don’t leave them with too little money to live on, it would be advisable to consider taking a comprehensive review of your family’s needs. Be sure to talk the numbers through with your partner.
In addition to death benefits, there are a few other essential aspects of wholistic financial planning to consider when you’re purchasing life insurance. For instance, many Civilian Federal Employees are bundling Chronic Illness Riders into their policies to protect them in case of a life-changing permanent illness.
Finding Your Best Number
You can use the general formula that involves taking your financial obligations and subtracting liquid assets to calculate your target amount.
- Calculate obligations = Annual salary + mortgage balance + other debts + future needs like college and funeral costs.
- Then, subtract liquid assets such as existing college funds, savings, and current life insurance.
You can also use our new Needs Analysis Calculator to determine how much coverage is needed to protect your loved ones after you're gone.
When you’re in the market for life insurance, consider Group Term Life Insurance* coverage from WAEPA. With over 75 years of experience serving Civilian Federal employees, WAEPA is proud to offer attractive and competitively priced life insurance programs. Learn more at waepa.org today.
*Underwritten by New York Life Insurance Company
Worldwide Assurance for Employees of Public Agencies (WAEPA), is a nonprofit association (not an insurance company) formed by federal employees, for federal employees. The goal of WAEPA is to provide access to products and services that promote the health, welfare and financial well-being of its members. After 75 years in business, WAEPA has over 44,000 members.
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