Life Insurance - Part 1

Life insurance is a financial product that should be used to protect against the loss of your future income stream for your dependents.

Life insurance is an awkward subject to discuss because it also means discussing death. Frankly, there is no  way any of us are getting out of this world alive. We just don't know when it will happen. With that in mind, you really need to plan as if you might die tomorrow when assessing your life insurance needs. This may all sound morbid, but you need to be practical and pragmatic here.

Life insurance is a financial product that should be used to protect against the loss of your future income stream for your dependents. The protection is to cover the risk of you dying. Today, however, life insurance is sold for many other reasons as well. It can be used as a way to leave an inheritance to your children or to protect a business should a partner die. Here, however, we're primarily interested in protecting your dependents.

Let's determine how much life insurance you need. There are a lot of simple methods that insurance salesmen use. It might be eight times your present income or $100,000 of insurance per dependent. See if you can be a bit more precise. Look at your net worth. What do you have in assets that would be available for you spouse and children to use should something happen to you? How much life insurance do you have through your employer? Do you have young children that will needs childcare? Do you have an emergency fund to meet any short-term cash needs that may occur immediately after your death? For example. this might include the cost of a funeral, for which, conservatively, you'll need at least $6,000.

Next, review your cash flow. If you're married, could your family survive without your income? Do you know what your spouse's earning potential is over the next 20 years? How much does it take to maintain the family's lifestyle? Take a good hard look at those numbers.