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Why Do I Need Life Insurance?

The right amount of life insurance depends on your own unique situation. When making the decision on how much coverage to purchase, it is important to consider what you have in terms of assets and income, as well as what your family will need for the future.

What You Have—Assets and Income

If you are married does your spouse earn any income?

A spouse's income should reduce the amount of insurance you need. If your spouse plans to increase his or her earnings if something happened to you, this would further reduce your coverage needs.

Do you have any assets that you would consider selling?

Selling assets is an option, but only if they won't lose value if you have to sell them on very short notice. Carefully consider what assets you would want liquidated. Assets with stable values and without penalties for selling them are worth considering. Assets with fluctuating values or those with selling penalties are generally not as easy to rely on.

Do you have any existing life insurance from work or that you own individually?

Life insurance is generally paid within a short time after notification of death is received by the insurance company making it a very liquid asset. If you already have life insurance, it is usually a good idea to keep it and add to it if you need more coverage. If you are considering discontinuing existing coverage and replacing it with new coverage, be sure to carefully compare your existing coverage and the proposed new coverage.

What Your Family Needs for Their Future

How much income will you want to replace?

The most common reason people buy life insurance is to replace the income that their family would lose if something happened to the insured individual. You should consider whether you want to replace all of your income or only a portion of your income for one or more years.

Which debts would you want paid off if you died?

It is generally best to pay off debts that have the highest interest rates, such as credit cards. After that, consider which debt payments are manageable for your family and which are not. The payments that create the biggest burden should be paid off using life insurance.

Will you want to establish an education fund for your children?

Educating your children can be very expensive. There are many ways to save money on a tax-favored basis. Unfortunately if something unexpectedly happens to you, there may not be enough time to set aside adequate funds for education. Consider what type of school your children might want to attend and whether they would qualify for financial aid when they apply for admission. Life insurance can help by creating a lump sum of cash that you can count on to help offset the cost of your children's education.

Do you have three to six months of income readily available as an emergency fund?

An emergency fund should be invested in something that can be quickly turned into cash. Home repairs and automobile repairs are two of the most common expenses surviving spouses incur after a death. If you don't have three to six months worth of income readily available, life insurance can be used to pay for those unexpected expenses.

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