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Understanding the value of life insurance
Money ManagementMonthly financial advice |
Don't look at life insurance premiums as a financial nuisance. Life insurance can help you to provide financial security for your loved ones and assist you in achieving your financial goals. That's why the Maryland Association of CPAs says life insurance is an essential component of most financial plans.
The proceeds of a life insurance policy can help your family meet ongoing expenses, fund major financial obligations (such as a college education) and maintain your current lifestyle.
The MACPA provides the following basic information to help you determine your life insurance needs.
Who needs life insurance?
If there are individuals who depend on you for financial support, you need life insurance. Life insurance provides income protection for your family in the event of your untimely death.
How much insurance do you need?
The amount of insurance you need varies over your life span. To arrive at an approximate amount, begin by calculating your normal monthly living expenses, such as utility bills, food, clothing, transportation, child care and other costs. Multiply this amount by 12 to arrive at an annual figure, and then by the number of years you want to provide this income.
Next, you need to add in the cost of any short-term needs such as final medical, funeral and burial expenses; estate taxes; major debts, such as your mortgage; and future expenses including the cost of your child's college education.
Once you've arrived at your total approximate income needs, you should calculate the resources you have to meet them. Include your savings, investments, retirement income, other life insurance and Social Security. Do not add the value of your home since your family will still need a place to live. Subtract your resources from your total income needs for an approximation of the amount of life insurance that can fill any income gap.
Term or cash value insurance?
There are two basic types of life insurance: term life insurance and cash value (or permanent) life insurance.
Term life is basic insurance that pays a death benefit if you die during the term of the policy. You can buy term insurance for one year at a time or for a specified period of time, generally between five and 30 years.
Cash value life insurance combines a death benefit with a savings or investment component that can provide benefits (for you and your family while you're still living.) The premiums you pay are used to make investments, so the policy gradually builds up a cash value that you can borrow against at a rate that is typically below the going market rate.
How much does life insurance cost?
The amount you pay for life insurance depends on a number of factors, including your age, your health and your family's medical history, whether you smoke, and the type and amount of insurance you plan to buy. Basically, the healthier you are, the lower the rates.
What else do I need to know?
An insurance policy is a legal document that may be difficult to comprehend. Be sure you understand what exclusions and limitations apply, when coverage begins and ends, how much coverage is provided, how much the premiums are and how to report a loss or claim.
As your life changes, so do your insurance needs. It's a good idea to review your policy each year and whenever you experience a major life event such as marriage, divorce or the birth of a child.
Where can I get advice?
CPAs agree that the best life insurance for your family depends on how much coverage you need, how much you can afford, the period of time you want to be covered, and whether you want pure protection or are looking for an investment as well. A CPA who is familiar with your financial situation can help you determine the coverage that suits you best.
Only CPAs are equipped to address your full range of financial needs with integrity and insight. In Maryland, CPAs must pass a rigorous two-day examination, adhere to strict ethical and professional standards, and, beyond college, complete 80 hours of continuing education every two years to be certified by the state — accountants do not.
Your doctor is certified; your lawyer is certified. Make sure your accountant is a certified public accountant.
For CPA referrals in your area, contact the MACPA at (410) 296-6250 or click here.
The Maryland Association of Certified Public Accountants (MACPA) is a statewide professional association that provides leadership, information and services for its nearly 10,000 CPA members, who are employed in private practice, industry, government and education. CPAs are business and financial professionals who have passed a rigorous two-day examination in order to be licensed by the state. CPAs are committed to protecting the public interest, and must adhere to stringent ethical and professional standards and continuing professional education requirements.