Strategic Planning Online

You are probably aware of the importance of having enough life insurance coverage to handle the financial contingencies that may affect your family in the event of your death. However, determining the necessary amount of life insurance can be complicated. One general rule of thumb is that you should have enough coverage to equal five to seven times your annual salary. However, you may want to determine the “right” amount of life insurance coverage with a careful “needs analysis” rather than using an arbitrary formula.

The needs analysis approach incorporates an evaluation of your family’s most important financial obligations and goals. This leads to planning insurance coverage to help address mortgage debt, college expenses, and future family income, as well as to provide liquidity for meeting future estate tax liabilities.

Mortgage Debt: The first point worthy of consideration is whether your life insurance proceeds will be sufficient to help pay the remaining mortgage on your home. If you are carrying a large mortgage, you may need a sizable amount. If you own a second home, that mortgage should also be factored into the formula.

College Expenses: Many people want life insurance proceeds large enough to help cover their children’s college, and possibly graduate school, expenses. The amount needed can be roughly calculated by matching the ages of your children against projected college costs adjusted for inflation. This calculation should be revised periodically as your children get closer to college age, and it may be a good idea to be as conservative as possible when estimating long-term savings goals.

Continuing Income for Your Family: The amount of income you will need to help provide for your surviving spouse and dependents will vary greatly according to your age, health, retirement plan benefits, Social Security benefits, other assets, and your spouse’s earning power. Many surviving spouses may already be employed or will find employment, but your spouse’s income, alone, may not be sufficient enough to cover the monthly expenses of your family’s current lifestyle. Providing a supplemental income fund can help your family maintain its standard of living.

Estate Taxes: Life insurance has long been recognized as an effective method for establishing liquidity at death to pay estate taxes and maximize asset transfers to future generations. However, this use of life insurance requires qualified legal expertise to help ensure the proper results.

Existing Resources: If your current assets and retirement plan death benefits are sufficient to cover your financial needs and obligations, you may not need additional life insurance for these purposes. However, if they are inadequate, the difference between your total assets and your total needs may be funded with life insurance.

There are many factors to consider when completing a needs analysis. In addition to the areas already mentioned, some other questions you might want to address include the following:

As you develop an insurance strategy, remember to analyze your existing policies. Calculate the additional coverage you may need based on your family’s financial obligations and any other resources, such as retirement benefits and savings. Remember, having the proper life insurance coverage can play a major role in any family’s financial future.

When discussing bank accounts, investments, loans, and mortgages, interest is an important concept to understand. In financial terms, interest is the price paid for the temporary use of someone else’s funds, and an interest rate is the percentage of a sum borrowed that is attributable to interest. Whether you are a lender, a borrower, or both, it is important to consider how changing interest rates may affect your financial decision making.

Borrowing money can help you accomplish a variety of financial goals, and the cost of borrowing is interest. When you take out a loan, you receive a lump sum of money up front and are obligated to pay it back over time, generally with interest. Because of the interest expense, you end up owing more than you initially borrowed. The tradeoff, however, is that you receive funds to accomplish your goals, such as buying a house, funding a college education, or starting a business. Given the cost of interest, which can add up significantly over time, it is important to make sure that any debt you assume is affordable and worth the cost over the long term.

To a lender, interest represents the compensation for the service and risk of lending money. In addition to giving up the ability to spend the money at the present, a lender assumes certain risks. One obvious risk is that the borrower will not pay back the loan in a timely manner, if ever. Inflation creates another risk. In general, prices tend to rise over time; therefore, goods and services will likely cost more by the time a lender is paid back money borrowed. Effectively, the future spending power of the money is reduced by inflation because more dollars are needed to purchase the same amount of goods and services. Interest paid on a loan helps to cushion the effects of inflation for the lender.

Interest rates often fluctuate, according to the supply and demand of credit, which is money available to be lent and borrowed. In general, one individual’s financing habits, such as carrying a loan or saving in fixed-interest accounts, will not affect the amount of credit available to the economy enough to change interest rates. However, a general trend in consumer banking, investing, and debt can have an effect on interest rates. Businesses, governments, and foreign entities also affect the supply and demand of credit according to their lending and borrowing patterns. An increase in the supply of credit, often associated with a decrease in demand for it, tends to lower rates. Conversely, a decrease in supply of credit, often coupled with an increase in demand for it, tends to raise rates.

As a part of the U.S. government’s monetary policy, the Federal Reserve Board (the Fed) manipulates interest rates in an effort to control money and credit conditions in the economy. Because of this, lenders and borrowers can look to the Fed for an indication of how interest rates may change in the future.

In order to influence the economy, the Fed buys or sells previously issued government securities, which affects the federal funds rate. This is the interest rate that institutions charge each other for very short-term loans, and it determines the interest rates banks use for commercial lending. For example, when the Fed sells securities, money from banks is used for these transactions; this lowers the amount available for lending, which then leads to a rise in interest rates. In contrast, when the Fed buys government securities, banks are left with more money than is needed for lending; this increase in supply of credit, in turn, lowers interest rates.

Lower interest rates tend to make it easier for individuals to borrow. Since less money is spent on interest, more funds may be available to spend on other goods and services. Higher interest rates are often an incentive for individuals to save and invest, in order to take advantage of the greater amount of interest to be earned. As a lender and a borrower, it is important to understand how changing interest rates may affect your saving and borrowing habits. This knowledge can help you make wise decisions in pursuit of your financial goals.

Your credit report is an accumulation of information about your bills and loans, your repayment history, your available credit, and your outstanding debts. These reports are typically used by lenders when deciding whether or not to accept a loan or credit application. A healthy credit report can help you secure the funding you need to purchase a new home or car, fund a child’s education, or start your own business. The following actions can help you maintain a healthy credit report.

Establish and Maintain History: A rich history about your ability to pay off debt over time will paint a more complete picture for a lender inquiring about your financial habits. Therefore, consider maintaining your oldest credit card. Credit companies often suggest that you also maintain four to six accounts to showcase your commitment to managing multiple debt sources.

Close Extra Accounts: We’ve all been tempted by the free t-shirts, duffle bags, and contest giveaways offered by credit card companies in order to attract new customers. However, after we’ve received the gifts, we often forget about the accounts we’ve just opened. Many open accounts on a credit report may be a red flag to a lender, indicating that you could easily get into financial danger with the large amount of readily available credit. Consider closing any accounts that you do not use. This strategy may also minimize your exposure to identity theft.

Note: Cutting up the card itself or just not using it does not mean the account is closed. To properly close an account, you must call or write to the company with your request.

Make the Minimum Payments: Delinquencies on payments remain on your credit report for seven years, even if you’ve since settled the account balance and paid the debt. Therefore, you should always try to make at least the minimum payments by the due date requested by the creditor or lender.

If you are in a financial bind and decide to ignore an account for a period of time, be aware that accounts sent to collection agencies or charged off by creditors, meaning they have written the debt off as a loss, will also remain on your credit report for seven years. Consider contacting your creditor if you find yourself in this situation, rather than just ignoring this serious problem.

Pay Down Your Debt and Keep Debt in Line with Income: Determine your debt-to-income ratio by adding the balances of all your loans and credit cards, and comparing that with the amount of income you receive annually. If your total debt exceeds more than 20% of your annual income, lenders may be hesitant to consider allowing you more credit. If you have a large amount of debt, develop a strategy to pay it off gradually and within your budget considering your other expenses. One strategy may be to consolidate your payments under a home equity loan, which offers tax-deductible interest payments. In the meantime, consider curbing excess spending and avoid further debt.

Control the Number of Inquiries about Your Credit: A large number of inquiries on your report may signal to a lender that you are in need of a lot of credit or preparing to take on a large debt. Neither situation bodes well for your ability to take on additional debt. Be aware that each time you apply for a new credit card, even if it is only to receive a free gift, an inquiry will appear on your report. Inquiries remain on your report for two years.

OPT-OUT of Inclusion on Marketing Lists: While soft inquiries, those made by marketers and others wishing to sell you something, do not usually appear on the version of your credit report shown to lenders, these inquiries indicate that your personal information may be available and used by the companies listed, increasing your exposure to identity theft. Many marketers receive lists of potential customers directly from credit bureaus. You can “opt out” of being included on lists sold to these companies by either writing to each of the three credit bureaus or calling (888) 5OPTOUT. This action will remove your name from marketing lists for two years.

According to the Fair Credit Reporting Act (FCRA), you can request a free copy of your credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) once a year. For your convenience, you can access all three agencies through the website www.annualcreditreport.com. Monitor your credit report frequently and take actions that build and maintain good credit.