Personal Finance After 50 For Dummies - Eric Tyson

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other companies, insurance companies are in business to turn a profit. So you want to make sure you obtain proper insurance protection at a competitive price and buy only the coverage you need.

      Needing insurance is kind of like needing a parachute: If you don’t have it the first time you need it, chances are you won’t need it again. Regarding your need for life insurance, of course, you don’t get second chances. (Unless you’re considering near-death experiences; and the life insurer doesn’t pay out for those!) So if you need life insurance, you should get it as soon as possible.

      The following sections explain what life insurance can do for you. They also help you determine whether you need life insurance, and if you do, how much you should consider buying.

      Understanding the purpose of life insurance

      The primary reason to consider buying life insurance is to provide financially for those who are dependent on your employment income. However, just because you have a job, earn employment income, and have dependents (children, a spouse, and so on) doesn’t mean that you need life insurance.

      So how do you know whether you need life insurance coverage? Your current financial situation is an important factor in determining your need. If you haven’t already assessed your retirement plan and tallied your assets and liabilities, be sure to read Chapter 3.

      

If you’re still working, aren’t yet financially independent, and need your current and future employment income to keep up your current lifestyle — and you’re saving toward your financial goals — life insurance probably is a good choice. If you have others depending on your continued employment income, you generally should get term life insurance coverage (which we discuss in the later section “Figuring out what type to buy”).

      On the other hand, you may find that even though you’re still working, you’ve achieved financial independence. In other words, you’ve accumulated enough assets relative to your spending to be able to actually retire and no longer need to earn employment income.

      Determining your life insurance need

      Each person’s circumstances vary tremendously, so in this section we don’t tell you specifically how much life insurance to get. Instead, we show you the factors you should consider to determine that amount. We’re not fans of general rules like getting ten times your annual income in coverage, especially for those approaching or already in their senior years. The reason? Each person’s circumstances can vary tremendously among many factors, such as:

       Your assets: Generally speaking, the more you have relative to your income, spending, and obligations, the less life insurance you need.

       Your debts: Of course, not all debts are created equal. Debts on real estate or small businesses tend to have lower interest rates, and the interest is often tax-deductible. On the other hand, consumer debt — such as credit card and auto loan debt — tends to be at higher interest rates, and the interest generally isn’t tax-deductible. Overall, the more total debt you have, the more life insurance you’re likely to need.

       Your health and the health of your family members: If you have major medical problems or have a family member who’s ill or who has special needs, you may need more coverage.

       The number of children you desire to put through college: A four-year college education, especially at private schools, is a major expense. So, if you have kids to put through school — and they may attend costly schools — you could be talking some really big bucks. And you face even bigger bucks if you want to help them through graduate or professional school after college.

       Whether you’ll have elderly parents to assist: Of course, this factor is difficult to predict, but you should have some sense of your parents’ physical and financial health. If you don’t, try to broach the topic in a sensitive fashion with them.

      

After completing your retirement planning (see Chapter 3), you should have the current financial information you need to begin your calculations for how much life insurance you need. Here’s a quick and simple way to determine how much life insurance to consider buying:

      1 Determine your annual after-tax income (from working, not investments).You can find this number on your tax return or W-2 form from the past year. (The reason you work with after-tax income is because life insurance death benefit payouts aren’t taxed.)

      2 Determine the amount of money you need in order to replace your income for the appropriate number of years.You can find this amount by simply using the information in Table 2-1.

      3 Consider your overall financial situation and whether you need to replace all your income over the time period you chose in Step 2.High income earners who live well beneath their means may not want or need to replace all their income. If you’re in this category and determine that you don’t need to replace all your income, apply an appropriate percentage.
To Replace Your Income for This Many Years Multiply Your Annual After-Tax Income by
5 years 5
10 years 9
15 years 12
20 years 15
25 years 17
30 years 19

      Assessing your current life coverage

      Before you rush out to buy life insurance, make sure you first assess how much coverage you may have through your employer and through Social Security. The amount of coverage you have could reduce the amount you need to purchase independently. Employer-based life insurance coverage is an easier issue to deal with compared to Social Security survivor’s benefits, so we address it first.

      Employer-based life insurance

      Some employers offer life insurance coverage. If it’s free, by all means factor it into your calculations for how much additional coverage you may need. (Refer to the preceding section, “Determining your life insurance need,” for more on calculating the coverage you need.)

      For example, if your employer gives you

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