Sunday, May 25, 2014

How much life insurance do I need? - By Peter Hanson

“How much life insurance do I need?” is a question we are asked often. Just about everyone needs life insurance. Unfortunately many go without and many more don’t have enough. You need life insurance if someone else will be affected financially by your death. There are multiple formulas for figuring out how much to buy. By doing a little research someone may get inundated and frustrated with information and tools to use when trying to figure out how much life insurance to purchase. There are multiple life insurance calculators and broker questionnaires that take into account debt, college for kids, cost of living increases, among others.

In addition to protecting those you love, certain kinds of life insurance are bought as an investment tool. Typically individual life insurance is purchased with after tax dollars therefore money you received from the policy is done so tax free.

There are many types of life insurance. There’s Term Life, Whole Life, Universal Life, Indexed Universal Life, Final Expense Insurance, and more. They all are bought for different reasons but they all do the same (single) thing. They protect your dependents from losing the income you generate.

A good place to start and a simple way to calculate how much you’re worth is by looking at how much you make. You start with how much money you earn annually and multiply that by how many years you have left to work. Let’s say you’re 50 years old, you make $50,000 per year and you plan to retire at 65. The death benefit of your life insurance policy should be at least $750,000. Your “monetary” value to the people that depend on your income is what you are insuring. Simply put… By purchasing life insurance you are replacing your ability to generate income if you aren’t around anymore.

It’s very important to protect the security your dependents have by way of your income. Imagine you have a machine in a room of your house that prints money and it prints $50,000 per year. You would surely lock it up to keep it safe, clean it and oil its parts. You would do your best to make sure no harm comes to it. You may even go so far as to buy a warranty to insure this machine in the event of a malfunction or needing a replacement. 

With all the preventive measures you take to keep that machine going you certainly wouldn’t want it getting seriously sick into a car and driving to work every day on the Maine winter roads. You probably wouldn’t be eager to let it climb a ladder to do some roof repair or go boating on Sebago. But if you did have to let this money making machine go do all these things you would look to find a way to protect the income that machine makes for you year after year. You have a lifestyle, bills to pay and future plans that depend on the income your machine generates. 

You too are a money making machine and if others depend on that income to pay the bills and continue with the plans that were made there’s an easy way to protect them.

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