The Right Life Insurance Strategy
If you have financial obligations that would be significantly harmed by your pre-mature death, you should consider what role life insurance can play in managing that risk.
It is not the only tool that you can exercise in solving this problem, however, it can be very valuable in covering the risk in the short term at least. In other words, there are steps that you should take to improve your net worth and protect your family whether you live a normal life span or die sooner. But in the meantime, you should have some life insurance to bridge that period until you have self insured by reducing the risk to your survivors.
The first step that you should take is to carefully consider your current net worth. This is basically your assets minus your liabilities. All of your assets including the net equity in your home, retirement plans and other liquid securities minus the debts for which you are responsible.
Then you should consider the surviving family members who would be financially impacted if you passed away in the near term. This may include your spouse, children and even your parents who may be dependent on you.
An estimate of the financial gap left by the loss of your income on this group of people can be estimated and a lump sum can be calculated that would help to replace your potential salary and investment income over time.
Ways that you can reduce the size of life insurance benefits that you need to purchase include:
1. Reduce the debt that you have in your name, especially consumer debt like credit cards and car loans.
2. Build an adequate cash reserve that covers family concerns that may happen at any time.
3. Review all of your employee benefits to correctly identify what death benefits you already have through your employer. It is less valuable but you also want to define how much life insurance that you have through your auto insurance.
4. Make an estate plan that adequately protects your spouse and dependent children so that you know what capital will be necessary to maintain a similar standard of living, including retirement and college goals.
5. Shop for an adequate term life insurance policy that will be affordable and large enough to take care of the needs of each person who is important to you.
You are not even ready to choose the insurance company or go through the underwriting process until these personal issues have been well defined. Once you have done this analysis, you will be able to answer why you are making this investment and how this death benefit lump sum will be able to meet your family’s needs at your death.
