life insurance

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Before considering what type of life insurance to buy (term or cash value) or where to get a good buy, you need to choose an amount. This depends on your unique financial picture and you will not get your best answer using a rule of thumb such as "you need ten times your annual income." Individual circumstances vary greatly. Even among life insurance professionals, you'll find a range of recommendations for the same family situation.

While life insurance is an important element in providing protection for one's family, its cost is just one of many competing needs. Most people's discretionary money (what's left after taxes, tithe, housing, auto, groceries, etc.) is pretty limited. But the ways to spend it for the family's welfare are unlimited: building emergency funds, reducing debt, saving for the next car, children's education, and of course a host of different insurances (like life, health, disability, and homeowners).

Some of the considerations which should be kept in mind are:

1. Establish basic objectives such as leaving a paid-for home, no debts, an emergency fund, and income for basic living expenses.

3. Distinguish between present life-style and insured life-style. The large house (with its higher taxes, utilities, and upkeep) of a high-income family may not be prudent for a widow without that higher income. Ask if mom and the kids would ultimately move if dad died. If the wife moves back to her hometown near her parents, what are housing costs there? Trading down to a smaller house should release some of the equity in the home, which is itself a form of life insurance.

4. Ask "How well am I insured already?" Consider assets such as life insurance through your employer, Social Security, savings, retirement funds, and the surviving spouse's income potential. Retirement accounts such as a 401(k) or IRA are available to beneficiaries at death without the 10% early withdrawal penalty.

Determine the adequacy of these assets to retire the mortgage on a suitable house, pay for the funeral and other debts, and to establish an emergency fund. I suggest a $50,000 emergency fund (that could even be used to update an auto if needed). If assets are inadequate for achieving your basic objectives, you can then supplement them with an insurance policy.

Once the insurance proceeds remove the debt and stabilize the family's finances, Social Security survivorship benefits pay a monthly income that's often adequate until ...