Without a doubt, it is important to have enough life insurance coverage to handle any financial contingencies that may affect your family if you die prematurely. However, determining the amount of life insurance you need is not that simple. One past rule of thumb was that you should have enough life insurance to equal five times your annual salary. But more frequently, having the appropriate amount of life insurance coverage requires 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 could include insurance coverage for mortgage debt, college expenses, future family income, and creating liquidity for future estate tax liabilities.
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 other assets, retirement plan benefits, Social Security benefits, age, health, and your spouse's earning power. Many surviving spouses may already be employed or will find employment, but their income is based on education, training, and experience. Your spouse's income alone, may be insufficient to cover the monthly expenses of your family's current lifestyle. Providing a supplemental income fund will help your family maintain its standard of living.
Mortgage debt. You need to consider whether your life insurance proceeds are 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, the mortgage on that home also needs to be factored into the formula.
College expenses. Many people want life insurance proceeds large enough to cover their children's college expenses and possibly graduate school. To determine the amount needed, you have to take into account the ages of your children, the anticipated return from investing the life insurance proceeds during pre-college years, and the projected costs for college adjusted for inflation. This calculation should be revised periodically as your children get closer to college age. Keep in mind, it is impossible to project inflation and earnings with any measure of precision for many years into the future. So, it may be a good idea to be as conservative as possible when estimating long-term investment gains.
Estate taxes. Life insurance can be an effective method for creating liquidity at death to pay estate taxes and maximize the amount of assets transferred to future generations. Using life insurance for estate planning purposes may require working with legal and financial guidance to help you establish the most suitable results.
As you develop your insurance plan, make sure to analyze your existing policies to ensure they’re still meeting your needs. Your insurance agent can help you determine the amount and kinds of coverage that’s appropriate for you.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any insurance product. To determine which product(s) may be appropriate for you, consult your financial professional prior to purchasing.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
This article was prepared by Liberty Publishing Inc.
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