Financial Needs Analysis Helps Benefits Planning

Sometimes people buy life insurance before performing a financial needs analysis. They might choose an amount that seems comfortable, without actually taking into account all the potential expenses their families might face in the event of an untimely death. If they did make an objective assessment of the possible economic consequences, they would be doing what is called a financial needs analysis.

In fact, you could analyze your own financial needs by following a few simple steps. First, total the value of all the things that you and/or your spouse own. These are your assets. (Enter amounts in one column for yourself, and in another column for your spouse.) Next, list and evaluate all expenses that you or your family may face, in the event one spouse dies. These are your potential liabilities. When totaling your assets and insurance, you might typically include what you currently have in savings and retirement funds (such as IRAs, 401(k) plans, or TSAs, etc.), as well as real estate and existing life insurance.

In order to determine how much cash is needed following the death of a spouse, take a look at these potential cash needs and assign a dollar amount to each:

1. Immediate Money Fund. The total cost of possible medical and hospital expenses, outstanding bills, burial costs, and attorney/executor fees. (It may be sufficient to set aside 50% of the higher wage earner's annual income for this purpose.)
2. Debt Liquidation. Your debt, if any, may be in the form of credit card bills, school and auto loans, unpaid notes, outstanding bills, etc. So that all debts may be cleared, record the total.
3. Emergency Fund. Unexpected bills not readily payable from current income, such as major home and car repairs, or even medical emergencies. (Again, 50% of the higher wage earner's annual income may be sufficient.)
4. Mortgage/Rent Payment Fund. How much would you need to pay off your mortgage or provide for at least ten years' apartment rent should one spouse die?
5. Child/Home Care Fund. Expenses created as a result of the death of a spouse who had been performing child and/or home care duties, but was not receiving any payments for it. (Estimate the cost of hired help needed to substitute your spouse's duties.)
6. Education Fund. The cost of funding a four-year undergraduate education or comparable vocational training for your children.