One of the most important aspects to any solid financial plan is to have adequate life insurance in place to cover the gap between what you have saved and what your dependents will need in the event of your death. Unfortunately, many people ignore this component of their financial plan thinking they are too young for anything bad to happen. The problem with that line of thinking is that when you are young and have little saved is exactly the time to have insurance in place.
Do I Need Life Insurance?
If you are under the age of 40 it is advisable to have life insurance. There are a few rare exceptions, such as those who have self-insured by amassing a significant portfolio of liquid assets. Another exception would be someone who has no dependents and no one counting on his or her income. In the latter case a simple burial policy may be all that is required if at least a few thousand dollars are not accessible for the appointed person to arrange a burial.
If you have kids, and you aren't one of those rare millionaires under 40 years old, then you need to purchase term life insurance. One thing married couples fail to realize is a non-working spouse has insurance needs as well. For instance, a full time mother may not bring in a traditional income, but if she were to die before her kids are grown there would be a heavy financial burden to replace the various services she provided as a stay-home mom.
How Much Insurance is Enough?
The good news is if you are young and in relatively good health term insurance policies are available extremely cheap. One should consider purchasing about ten times their annual salary in term insurance. Invested properly this money could generate 10-12% a year on average, and after discounting 3-4% inflation that leaves about 6-8% of this money available for use without touching the principle balance. So if a thirty-five year old executive with two kids made $100,000 a year he would need to purchase about $1 million in term life insurance. Using the example figures above this $1 million would generate about $120,000 in gains, annually. Assuming the surviving members of his household could live on $80,000 – $100,000 a year the original investment of $1 million would be protected for generations to come.
Life insurance policies, like wills, are the part of estate planning that no one likes to think about. However, death is inevitable and better to be prepared should something happen to you or a loved one. The loss of a loved one is one of the most traumatic experiences anyone can face, but the financial hardship it creates leaves a lasting struggle for survivors. Don't leave that kind of legacy to your children.