How to Purchase Life Insurance for Income Replacement
Purchasing life insurance for income replacement is not exactly a popular activity. The traditional worldview saw death as a part of life. In modern times, we separate the two. The subject of death is something we try to avoid. Oh certainly, in the abstract it’s easy to adopt a grim, gallows’ humor; but when the topic hits close to home, and the death you’re contemplating is your own, the humor gets a bit forced. It becomes particularly troublesome when you have to assign a dollar amount to that demise. Perhaps that’s the reason why people have difficulty arranging for their life insurance needs.
How Much Life Insurance Do you Need?
Unfortunately, there is no one size fits all when it comes to deciding how well a life insurance policy will fit a person’s needs. The answer at the heart of that question is a personal one, and must consider the varying needs, obligations and dreams we each have. At the same time, people share a need for insurance throughout their working career, regardless of their occupation, profession, or business. That need is to replace your income should it be lost due to your death.
Life Insurance for Income Replacement: What to Consider
The determination of your income replacement requirement will need some initial number crunching. The theory behind this approach is that your purchase of life insurance should be equal to the current value of your future earning potential. As such, you will factor in your current salary, annual raises, your earning rate, and finally your work life expectancy to arrive at a figure that will work for your needs.
Fine Tune that Income Replacement
Once you have arrived at a ball-park figure that will safeguard your loved one’s future, you can fine-tune your calculations. See if some of the survivor needs could be covered by other available assets. Make adjustments to include expected passive income such as retirement plan distributions. Be sure that your need for insurance in other areas, such as mortgage protection and educational funding, would not reduce the amount of money designated to replace your income. It is important to look at the whole picture of your insurance purchase needs and make sure they are all covered, before you finally settle on the amount needed for income replacement.
The purchase of life insurance for income replacement is worthwhile once you realize that your are securing the future of your loved ones. They are dependent on you now for their quality of life, and will remain so should they tragically lose you. That is why now is the best time to start buying it.