Determining Life Insurance Needs

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A standard expression among investment advisors is, "A man should have adequate life insurance." This is about as helpful as telling a man with a large family and a low-paying job that he should have an "adequate" income.

Assuming that a man's dependents will need considerable financial help if he should die soon, how much life insurance should he have? Before answering that question, he needs the answers to several others:

1. How much of his need for life insurance is already met? What are his survivors guaranteed, under the programs of the U.S. Government, his employer, and organizations of which he is a member?

2. What is his chance of death in the coming year? Assuming that his physical condition is average and. he takes no unusual risks, his chance of death depends mainly upon his age. Between ages two and 32 it is less than one in 500; at age 40 about one in 250; at age 50, one in 100; at age 60, one in 40; at age 70, one in 20. Women's mortality rates are lower than men's of the same age. For young people of both sexes, the mortality rates in recent years are only a fraction of what they were 50 years ago, and presumably the rates will continue to decline.

3. Thinking about mortality rates brings a man to this dilemma. In youth, his chance of dying is almost too slight to worry about, but life insurance then has a comparatively low cost. From middle age on, his chance of dying increases rapidly, and so does the cost of insurance, on either an old or new policy.

4. How badly would his family be hurt by his death, in comparison to other financial troubles that may strike them? Especially after men and women reach middle age, their main financial problem of the future is probably not premature death but the opposite, the risk of living too long after earned income stops. For any difficulty except death, pure life insurance is useless, and money put into an insurance policy with a savings combination will not grow into as large a fund as if placed in other well-chosen investments.

Looking on life insurance as a temporary substitute for capital a man intends to acquire, what is a sensible relation between the amount of life insurance and his program for accumulating capital? To simplify the answer to this mean question, let us start by assuming that whenever a man dies, he wants to leave an estate of the same dollar amount. At first, when he has no capital, his estate will contain only life insurance; but as his savings grow, he will gradually replace the insurance with accumulated capital. To carry out this idea, the original value of life insurance should not be a larger amount than he can match by capital accumulation within a reasonable time.

Remembering that, in middle age and later, the cost of maintaining life insurance is high enough to interfere seriously with saving from salary. That being said, if you have a family that relies on you for their well being, it is wise to consider getting life insurance well before you reach middle age.

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