Life insurance is critical for anyone whose death would leave survivors - typically a spouse or children - in a financial bind. Add owning a business into the equation and it's even more crucial.
At a minimum, every parent should have life insurance coverage to see their youngest child through college. And even the adults-without-kids crowd may need life insurance to cover large shared financial obligations such as a mortgage. But for those who own a business, insurance can be the determining factor in whether the business survive long enough to be a source of income for heirs, or to be a saleable asset.
How much you need depends on your personal and business circumstances. From a personal standpoint one of several online calculators (www.life-line.org, for example) can compute what your family will need to cover costs, assuming inflation and a reasonable rate of return. As a rule, you'll want to get enough of a payout that, wisely invested, will generate your current income. A business owner who takes home $50,000 for example, would need a pool of rougly $1 milion, which , earning a conservative 5 percent per year, will replace that annual income.
To factor in your businsess needs, consider the costs of running your business. Plan to have enough life insurance to cover company debt, as well as to replace lost income and fund the cost of replacing yourself. If you hold a business loan, the lender will likely call the loan on your death, leaving your successors or heir with no working capital.
Once you have an idea of your insurance needs, it's time to figure out what type of policy will work best for you. Insurance generally falls into two categories: term and permanent. Term insurance is fairly inexpensive upfront and provide a guaranteed death benefit over period of time, usually 20 or 30 years - at which point your heirs are expected to be self-sufficient. Permanent life insurance - investment product such as whole, variable or universal life - affords lieflong protection with the opportunity to accumulate cash value, but at a much higher premium.
Finally, convertible insurance is term insurance with an option to switch to permanent at the end of the term, regardless of your medical condition - a key benefit, because premium for brand-new policies rise dramatically as you pass middle age or as your health deteriorates. Another plan type to consider is a term policy from the insurer when your current one expires, again without having to "requalify" medically.
If this dizzying array seems overwhelming, a tursted financial advisor can help you look at various life insurance policies in the context of your overall finances and guide you through the options. Be forewarned, however, that many insurance agents are financially incented to steer you toward investment-based insurance policies.
To find a good agent, don't rely soley on referrals from friends. Look for agents who have the designation CLU (Chartered Life Underwriter) signifying three years of job experience and two years of course work, including classes in financial planning. That will enable them to help you fine tune your decisions. •