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How Much is Enough?

Steps to figuring out your life insurance needs
By Robin Jones

John and Sallie Smith, ages 38 and 36, have a mortgage on their home and have two children: Johnny, 4, and Karen, an infant. Both parents work outside the home, and both want the surviving spouse to be able to maintain the family’s current standard of living and continue to contribute toward important family goals (like sending the kids to college) if one of them should die unexpectedly.

The Smiths, a hypothetical family, are perfect candidates for a life insurance needs analysis, which some insurance providers, including the Auto Club, conduct for no charge. John and Sallie already have some life insurance, but because they now have two kids, they don’t think they have enough.

The truth is, there’s no one-size-fits-all answer, but nearly everyone with dependents needs a life insurance policy. If a family plans for their long-term needs when they first purchase a policy, they can feel secure knowing they’ll have enough coverage if tragedy strikes. A complete analysis of your life insurance needs will help determine if you have enough coverage to protect your family. Below, we look at the Smiths’ situation to give you an overview of what’s involved.

Immediate Cash Needs and Ongoing Income Needs
Immediate Expenses: Funds to cover such things as funeral expenses, legal fees, unpaid taxes, and hospital or doctor bills need to be accessible right away, so the Smiths set aside about $15,000 each for John and Sallie.

Education Funding: The Smiths provide enough in their individual policies for each child to attend a four-year university–approximately $151,000.

Debt Repayment: The Smiths owe $250,000 on their mortgage and have $45,000 in other debt, including student loans, car loans, and credit card debt, so they include $295,000 in each of their policies for debt repayment. The money doesn’t have to be used for that purpose, but the funds would enable the survivor to pay off the debt and remain in their home instead of possibly being forced to sell.

Ongoing Income Needs: John’s current annual salary is $80,000, and Sallie’s is $45,000–that’s $125,000 combined. If either died before retirement, the surviving spouse would probably need to replace most of the lost income. If John were to die first, the family would need 70 percent of John’s after-tax earnings over his expected lifetime, or about $1.25 million (which includes a 2.5 percent annual increase to offset inflation). Using the same assumptions, the family would need $355,000 to cover Sallie’s income.

Cash Sources and Income Sources
Before their needs were analyzed, the Smiths had a $200,000 life insurance policy for John and a $100,000 policy for Sallie. Other income sources would include Social Security benefits, money they’ve set aside for retirement, and a small amount of savings. The surviving spouse would continue to work outside the home.

The Conclusion
After adding up their immediate cash needs, education funding, debts, and ongoing income needs, then subtracting their existing life insurance, the Smiths decide to add $1.5 million to John’s existing life insurance policy and $716,000 to Sallie’s to secure their family’s financial future and give them peace of mind.

Your AAA life insurance specialist can conduct a free in-depth personalized Life Insurance Needs Analysis. To find one, call (855) 558-LIFE (855-558-5433) or visit AAA life specialists do not provide legal, tax, or financial advice.

Sept/Oct 2012 Issue


Robert Montani

Q: Why should I consider individual life insurance when I already have coverage through work? I’ve heard individual life insurance is expensive.

A: If you purchase your own policy, it can’t be taken away, unlike most employer-provided policies, which end when you change jobs or retire. With an individual life insurance policy, you control the policy and decide when to end it.

In addition, individual life insurance is based on your health and in some cases can be less expensive than purchasing coverage through your employer- provided group plan. Once they get a personalized quote, many people are surprised at how affordable individual life insurance is.

– Robert Montani
AAA Life Insurance Specialist
St. Louis, Mo.

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