Life insurance helps dependents

When you have a family that depends on your income, life insurance becomes an important part of your financial plan. This insurance gives your family a way to replace the income that you would have earned over several years, if you were to suddenly pass away.

The simplest form of life insurance, term life insurance, gives you a fixed monthly or yearly premium for a set “term” of your choosing, such as 10, 20, or 30 years. If you were to pass away during that term, your beneficiaries would receive the death benefit from your life insurance policy.

This benefit would allow your family to continue paying off the mortgage and car loans, take care of childcare expenses, settle funeral expenses, care for elderly parents, and take care of any other obligations that you had planned to fulfill with earned income. In all, life insurance can protect your family from financial hardship during a very difficult time.

Do you need life insurance? You should only buy life insurance coverage when you need it. If you’re not married, don’t have children, and don’t expect to provide financially for your elderly parents, then you probably don’t need life insurance at this point in time.

Also ask yourself if it would cause financial hardship for the people close to you if you were to pass away. For example, do you have enough in assets to cover funeral expenses, and if you don’t, would it cause financial hardship for your family members to cover those costs?

How long will you need life insurance? As a form of income replacement for your family, you only need life insurance for as long as your family is financially dependent on you. Your children will grow into adults, and will start financial lives of their own, separate from you. While they’re growing, you and your spouse will pay off your mortgage, and build up your own assets and retirement savings.

Think carefully about the point at which your children, and others, will be financially independent from you. You should also consider the amount of time that remains to pay off your mortgage in full.

How much life insurance do you need? You should only buy the amount of life insurance you need. To calculate this amount, work together with your spouse to come up with a list of basic financial needs, over the period of time that you wish to be insured.

Consider your contributions to the mortgage payments, and if you share a vehicle, your part in the car payments. How much do you spend annually on each child’s food, clothing, and entertainment? If one spouse stays home to look after the children, will you need to pay new caregiver expenses or can a relative care for the children? Do you and your spouse have any shared debts or expenses that you need life insurance to cover? Will you have educational expenses for the children, and have you included funeral costs? Do you have any assets that will help with these expenses, aside from life insurance?

Having the conversation with your family about life insurance, and thinking through your needs, is a good start. Next week, we’ll continue the conversation on life insurance in your personal finances.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years experience in retail banking and with financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com.

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