Your Money_ The Missing Manual - J. D. Roth [116]
The bottom line: For most people, the best choice is guaranteed renewable term life insurance. (Guaranteed renewable means that as long as you keep paying your premiums, the insurance company can't cancel your policy.)
Tip
Any time you make a major life change like getting married or divorced, don't forget to change the beneficiary on important legal documents like your life insurance policy, retirement accounts, and will.
How much life insurance do you need?
Not everyone needs life insurance. Like all insurance, it's designed to prevent financial catastrophes. So you only need it if other people—like your spouse and children—depend on your income. You need it less when you're older because your kids will be on their own and you won't have any debts (presumably, anyway).
Specifically, life insurance is valuable if you have kids living at home; have a spouse whose income alone couldn't support your family's lifestyle; have large debts (like a mortgage); are wealthy and might be subject to estate taxes; or own a business. If any of these describe your situation, then life insurance is a good idea. If none of them apply to you, then you don't really need it.
How much life insurance should you buy? Different experts give different answers. Some say your policy should cover five times your annual income, others say 10. And in The Money Book for the Young, Fabulous & Broke, Suze Orman recommends 20 times your annual income. The truth is there's no hard-and-fast rule.
Tip
For a little help coming up with a coverage amount, use this handy online calculator from the nonprofit LIFE Foundation: http://tinyurl.com/lins-calc.
Rather than base your life insurance coverage on your income, it makes more sense to base it on what your survivors will need to pay their expenses. Think about why you want the insurance in the first place: Is it to pay off the mortgage? To fund your spouse's retirement? To send the kids to college? Then get enough insurance to do that. You can comparison shop for insurance at sites like AccuQuote.com, DirectInsuranceServices.com, and SelectQuote.com.
Note
A brief word about disability insurance: You're far more likely to become disabled than to die prematurely, and the loss of income is just as real. Even if you're smart and pay yourself first by saving 10% of your income (see Get in the game), just 6 months' of unemployment can wipe out 5 years' of saving. So if you need your salary to live on, you should get disability insurance. This topic is beyond the scope of this book, but you can learn about choosing and buying disability insurance at http://tinyurl.com/GRS-disability.
What You Need to Know About Taxes
There's no way to cover the complexity that is U.S. tax law in just a few pages, and it would be foolish to try. Your accountant has spent years working with the tax code, and even she needs to use reference books. Instead, this section describes the basics of how income tax works and gives you some useful info on how to make smart tax moves.
How Income Tax Works
The basic federal income tax structure is pretty simple, but there are layers and layers of laws that make it complicated. At its core, the tax system involves the following steps:
At the end of the year, you tally your total income from taxable sources. (Some income, like that from child support, isn't taxable.)
You subtract certain allowable sums known as adjustments—like IRA contributions and moving expenses—to find your adjusted gross income, or AGI. (Your AGI, which is shown on line 37 of tax Form 1040, is a key number, and comes up again and again in tax discussions.)
Tip
The front page of Form 1040 lists adjustments; you can read more about them at www.irs.gov/taxtopics/tc450.html.
From your AGI, you subtract