Have you ever wondered how much life insurance is enough? One general rule of thumb says you should buy an amount equal to five to seven times your annual income. Sure, it may be a reasonable guideline, but this method does not relate life insurance needs to your personal financial goals.
A better method may be to implement a needs analysis. This process helps you determine your and your family’s future short-term and long-term financial needs. Once your needs have been identified, you can design a plan to help assure that money will be available to meet those objectives.
Needs analysis is not the highly technical financial planning associated with business ownership or planning for conserving, distributing, and coordinating wealthy individuals’ assets. Instead, it is appropriate for everyone. By assigning a specific dollar value to each item or “need” you want to provide for, needs analysis zeroes in on what may still be required, in terms of additional capital, to get the job done.
You can establish your financial priorities through specific questions designed to identify areas of concern. Here are some examples:
- What is most important to you?
- How would your objectives be affected in the event of the premature death or disability of you or your spouse?
- Is your current savings program adequate to accomplish your financial objectives?
Personal and Financial Perspectives
Most people’s needs typically revolve around attaining and maintaining a comfortable lifestyle. This often translates into a good home, the advantages of a college education for your children, enough income left over for leisure activities, and last but not least, a retirement income sufficient to maintain your lifestyle when your working years are over.
While saving and investing will undoubtedly be part of your overall planning strategy, it takes time to accumulate a pool of capital. One advantage of life insurance is that it creates an instant estate, which helps assure that money will be available to meet specific goals in case an untimely event, such as an early death, deprives you of the time required for wealth accumulation.
A complete needs analysis helps determine what is essential in creating and protecting the lifestyle you and your family enjoy. Even if your current income doesn’t stretch far enough to satisfy all of your future financial objectives, the needs analysis process will help you establish and focus on your priorities.
Your insurance professional can guide you through this comprehensive analysis to identify your goals and show you how life insurance can help meet your objectives. By initiating a plan of action, you can create an estate that will provide financial assets should you no longer be able to do so yourself. If you have any life insurance questions, CF Financial may be able to help. Contact us here.