Understanding the Need for Life Insurance

It is a good practice to hope for the best, but plan for the worst. An important component of planning for adversity is to ensure that you have adequate life insurance to cover your expenses and to help loved ones who depend on you to maintain their standard of living.

There are three major categories of expenses for which life insurance benefits are critical:

• Immediate expenses, which include funeral and burial costs, fees for attorneys, and outstanding debts;
• Ongoing expenses, which comprise the day-to-day expenses of people who depend on you and your income. Typical costs within this category include housing, food, utilities, clothing, and auto expenses;
• Future expenses, which include costs associated with college tuition and retirement for those who depend on you.

If you have no dependents or a spouse or others who depend upon you for financial support, then you need only consider the immediate expense category when planning for your life insurance needs. The exception to this would be if you wish to leave a contribution to a charitable group, educational foundation, or other recipient upon your demise. If this is the case, then you will need to determine the amount of your intended gift and make sure that the life insurance death benefit will cover both your immediate expenses and the amount of your gift.

If, on the other hand, you have a spouse, children, or others who depend on your income, it becomes a bit more complicated to estimate an appropriate amount of life insurance. The first step is to estimate the total amounts that are required for each of the three general categories, which can be tricky, especially in the case of future expenses. College tuition costs have risen dramatically in the past several years and future increases are predicted, so be sure to factor in the probability of future rises.

After you have estimated the figures for each of the three expense categories, you need to develop time lines. This involves using your best estimate as to when and for how long expenses will occur. When you add everything up and subtract any savings or investments you currently hold, you will now have an idea of the total amount that an optimal life insurance policy should provide.

Once you have an estimate for the amount of the death benefit you will need from your life insurance, you can start shopping for the best policy. One of the decisions you will need to make at this point concerns the type of life insurance you will purchase. While there are many different kinds of life insurance policies offered by today's insurers, one of the basic distinctions is between term and permanent life insurance.

Term life insurance provides a death benefit for a certain number of years as long as you pay regular premiums to the insurer. Once the term expires, the insurance is no longer in force, and you must purchase a new policy. Permanent life insurance, on the other hand, builds up a cash value that is in addition to the death benefit, and it remains in place indefinitely, as long as you make your premium payments.