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Life insurance factors

What's your life worth? If you've shopped for life insurance, that's sort of what you're trying to figure out. You've probably heard different people suggest vastly different calculations on how to reach the right number. The problem is that every person's situation is different, and although your financial situation may look the same as your neighbor's, your needs are different.

Initial Factors
The first reason to have life insurance if to pay for your funeral. The average funeral cost in the U.S. now exceeds $7,000. Unless you have that much money in savings, and it won't be needed, you should provide at least enough life insurance so that others aren't burdened by this expense when you are gone. If you have a family that depends on your income or savings that are in your name only, you might consider an additional amount up to $20,000 as a cash emergency fund to cover expenses until your estate is settled and everything is legally transferred or made available.

Most important factor is your dependents
A lot of insurance advice seems to be based on your marital status to determine your insurance needs, but it's not exactly the issue. The most important factor is if you have any dependents -- those who are (or who will be) counting on you to support them, either partially or fully -- and how many dependents you have. Here are other major factors to consider:

  • The kind of lifestyle you want to provide for your family
  • Your non-working spouse, who won't have an income if you die
  • Your working spouse who might need to "retire" to raise the children
  • Maintain the standard of living without that second income (less the expenses of the deceased spouse)
  • Mortgage (either pay it off, or continue to make payments)
  • Debts (car loan, credit cards, medical expenses)
  • College education costs for your children
  • Babysitting, house cleaning, etc.
  • Any special needs, such as a handicapped child or a child who will never be self-supporting
  • Your parents, who may eventually become financially dependent on you

Even if you're wealthy and think you might not need coverage, reconsider. You still may need life insurance if your taxable estate approaches $1 million if you're single or $2 million if you're married, although in this case you should have already done proper estate planning to minimize estate taxes. (For 2010 and beyond, the estate tax is repealed.)

If either of the above applies to you, and your estate doesn't have enough liquid assets to pay estate taxes, you need more insurance. The Internal Revenue Service will want cash from your estate within nine months, and you might have to invest in a life insurance policy to pay for this.

Childless now, but what about the future?
If you're married and don't have children, your insurance needs could vary from almost nothing to needing a lot of coverage. If your spouse can live on his or her income alone and you don't have a mortgage or don't care whether it's ever paid off, your only need may be to cover any final expenses incurred at your death.

You still should consider the possibility that your parents may depend on you in the future, or that you may want to help pay for college costs for a family member (a niece or nephew, for example).

Special needs of divorced people, singles
Divorced people have special insurance needs. If you fall into that category, you'd better examine your divorce agreement. It may stipulate that you have to keep a certain amount of life insurance in force for your ex-spouse or to pay your part of your children's education. Even if your divorce agreement doesn't require it, if you have children, you should have life insurance in order to continue to support them as long as necessary and to cover your part of their college costs.

Single people are often told that they don't need insurance, or that the small policy that comes with their work benefits is enough. In many cases, that's absolutely right. If you lead a simple life with no mortgage and no significant other, a life insurance policy may just be an unnecessary expense. There are certain instances where you may need it, however. If one of these scenarios applies to you, start thinking about life insurance:

  • You have a mortgage that is more than the value of your house
  • A relative has co-signed on your mortgage; having it paid off immediately at your death means he/she does not have to make monthly payments until your home is sold
  • You have a friend or relative to whom you want to leave money
  • You have bought a house with your live-in partner and you have an agreement that each person's share of the mortgage is to be paid off upon his or her death
  • Your parents won't be able to manage financially if you're not around
  • You want to leave money to a charity or other non-profit organization
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