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How Much Life Insurance Do I Need?

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Congratulations! You are thinking about life insurance. It can be kind of creepy to think about, and it can be really confusing to sort out the details. We can help!

Bottom Line/Personal: Tom, life insurance—what is the strategy that someone uses when he or she is trying to figure out how much life insurance he needs?
Thomas J. Henske, CFP The number-one question I get when someone’s talking life insurance is, “How do I figure out how much I need?” There are two schools of thought. The first is needs analysis, and that is where you just tally everything that you’re going to need to leave if something were to happen to you. For example, college funds for the kids…paying off the mortgage…having a pot of money that will throw off an income that will be sufficient. The other school of thought, which I think is the more conservative way, is called human life value, and that entails figuring out what the present value is of your future earnings. What that’s going to lead to, in most cases, is a higher life insurance amount, which is also, by the way, going to correspond to a higher cost, but it is certainly the more conservative way to think about it.
Bottom Line: How about whole-life versus term insurance?
Thomas Henske: Ah…renting versus owning, right? So term insurance is like renting—you pay for the insurance…it lasts for a certain period of time…and most people outlive their term insurance. Whole-life insurance lasts for your entire life—there is much higher outlay for that insurance coverage, but you know that it’s going to pay off at some point. The answer is, it probably ends up right down the middle—having a combination of the two, because over time you want to make sure that you do have a block of insurance in place that lasts for your entire lifetime.
Bottom Line: How frequently does someone need to review his or her life insurance policy to see if it needs to be changed?
Thomas Henske: Well you know I’m a financial advisor so I’m going to tell you every year, but I think you’ll probably get away with every two to three years, because, let’s face it, things change, so the things that you’re protecting in your 20s and 30s might be different from the things you’re protecting in your 50s and 60s. Perfect example—your kids are already off to college and maybe you don’t need to protect for covering that expense in your 60s.
Bottom Line: Great. So, really, any significant life change would be a trigger.
Thomas Henske: Absolutely. Getting married, having children, buying a home—those are usually some of the triggers that cause people to reevaluate their life insurance.
 

The bottom line on health insurance—you want to make sure that you’ve got your loved ones’ needs covered well into the future. You probably want to review those needs every few years, and you might consider a combination of term and whole-life insurance so you’ve got yourself covered now and well into the future.

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Source: Thomas J. Henske, CFP, ChFC, CFS, CLU (chartered life underwriter), CLTC (certification in long-term care), partner at the wealth advisory firm Lenox Advisors, Inc., which has offices in New York, Chicago, San Francisco and Stamford, Connecticut. LenoxAdvisors.com Date: June 1, 2014 Publication: Bottom Line Personal
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