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Preparing for Tomorrow

In the event of death, how much income would your beneficiaries need? If you are single, there may only be a need to pay any outstanding debts and funeral expenses. If others depend on your income, you need enough death benefit to replace that income for a period of time, perhaps indefinitely.

Life Insurance
The primary purpose of life insurance is to pay your bills and provide income for the people who rely on you financially.

One simple way to calculate your life insurance requirements is to estimate income needs by category and add them up:

  • Ongoing household and beneficiaries' living expenses; and
  • One-time expenses — such as funeral expenses, estate taxes, children's education, mortgage, and other large debts you may want to pay off.

Your Mortgage
Many people include their mortgage balance in their life insurance calculations because they do not want to leave their spouse or beneficiaries with such a large debt.

Depending on the interest rate on your mortgage, it may make more sense to pay the premium directly to the mortgage company each month instead of the insurance company.

Of course, you'll also need to consider your spouse's ability to continue the mortgage payment, should something happen to you.

Subtract your estimated Social Security death benefit paid to your survivors, any additional household income, and other liquid assets. (Be sure that you don't include the family heirlooms as assets unless you intend for your family to liquidate them.)

The bottom line should give you a general idea of your life insurance needs. Be sure to evaluate coverage your employer offers, if any. It may be a small amount, but every little bit counts.

A rule of thumb: A death benefit should be five times your gross annual income, if your family is completely dependent on you. (If you have young children, some experts suggest raising that to seven times your annual income.) It is also important to make sure your spouse has appropriate coverage, whether he or she is a homemaker, or brings additional income into your home.

What Kind of Life Insurance?
Evaluating which type of life insurance to purchase can be difficult. There are several types — and it pays to understand the differences before you buy. The most familiar types of insurance today are term insurance, straight (or whole) life insurance, and universal life.

Term Life Insurance: Term life offers temporary insurance coverage with no "cash value," which means you buy only the death benefit — no savings accumulate in the policy.

Term policies are issued for a period of years, after which the insurance coverage can be renewed at a higher rate. The older you get the more expensive the premium becomes.

Term insurance can work well for younger families because it allows them to purchase substantial coverage at a time when other life insurance products may be too costly.

Long Term Care Insurance
You may be surprised to learn that one out of three Americans over the age of 65 will spend a period of time in a nursing home. And, the average stay is about three years.

Today, that can easily cost $170,000, and in some regions twice that amount.

For the most part, Medicare, Medicare supplements, and your health insurance do not cover these expenses. Many who begin paying for nursing home care find their savings are not enough.

So, how can you ensure you will be able to have the care you need?

One way is with long term care insurance. In addition to nursing home coverage, long term care insurance covers visiting nurses, home health aides, friendly visitor programs, home delivery meals, chore services, and adult day care centers.

Remember, most of us are likely to need some assistance later in life — either at home or in a nursing home. Consider how you will pay for these expenses. You may want to include long term care insurance in your financial plan.

Whole Life Insurance: Whole life offers a specified death benefit with an unchanging premium. You select the size (face amount/death benefit) of your policy, then premiums are calculated using your age at the time of purchase. The younger you are, the lower your annual premium. You pay the same amount throughout your life. Your beneficiary receives the "face amount" upon your death. Whole life insurance has a higher initial premium requirement than term life insurance.

In addition to insurance protection, whole life also has a saving feature. Part of your premium payment earns a fixed rate of interest over time. As the years continue, your savings grow from your payments and earned interest. This growth is known as your policy's "cash value." If you decide to cancel (cash surrender) your policy, you can receive the cash value as a lump sum. In contrast, if you cancel term life insurance you have nothing. You can also borrow against the cash value of your whole life insurance policy. But, an outstanding policy loan will reduce the benefit your family would receive in the event of your death.

Universal Life: Universal life is like whole life in that it allows you to accumulate a cash value in addition to providing insurance protection. With universal life you have the flexibility to increase or decrease the amount of coverage and vary your premium payments. You may even be able to skip premium payments. You may cancel your policy and receive your cash value or borrow against it. You may also be able to take partial withdrawals. The interest paid on the cash value is set by the insurance company. (The interest rate is set for a period of time with a guaranteed minimum interest rate.) The flexibility of universal life allows you to adjust your policy to accommodate your changing needs.

Planning for Today -- Your Safety Net  Education