The belief that one can never have too much life insurance is a myth. There are only two reasons why one should have life insurance:
- To settle claims against your estate and
- To provide cover for your dependents.
To determine exactly how much coverage you need for each of these two needs, a financial need analysis must be done and planned accordingly.In the event of your death there will probably be claims against your estate, such as debt. After your death, your executor must pay all your creditors before the estate can be completed. Usually it includes your mortgage, the financing of your vehicle, rental purchase agreements and taxes, such as income and estate tax. Also, provision should be made for any capital gains tax.
It is often forgotten in the executor’s process of some contingent liabilities, such as when you are responsible for someone else’s credit and the borrower chooses to claim the amount due from your estate. People who run their own businesses sometimes end up in this trap if they have obtained the loan from personal assets or to be self-guilty. Life coverage is also required to provide capital for your dependents so that their level of living can stay at the same level as when you lived. The amount of capital you will need depends on the assets you have built up and the needs of your dependents.