Life insurance can be pretty confusing. As a financial planner, I often get asked about it. Probably the most common question I hear is: in my case, should I even have life insurance?  

It’s a good question. You are probably familiar with the prevalent ads showing families smiling at each other as if to say “thank goodness we have life insurance!” It’s an important coverage, but it’s not necessarily a panacea. It’s very important to know why you have life insurance, so you can choose the right type of policy and the right amount of insurance. So here’s a helpful acronym to find out your WHY.

Reasons to have life insurance:
L egacy – leave a gift to someone (including charities)
I ndebtedness – pay off debt
F amily – create a “paycheck” for spouse/children when you aren’t around anymore
E xpenses – burial and final expenses, including outstanding medical not covered by health insurance.

Do you have one or more of these reasons? Then you may want to look into having life insurance. If you don’t have any of these needs, then you might not necessarily need life insurance. It’s a very personal decision.

If you do think you need life insurance, the next question naturally becomes, how much insurance should I have? To answer this, I think the key is to refer back to the reasons above and ask yourself: WHAT’S THE GOAL?

Here’s how you could be smart in aligning the amount of insurance to a particular goal or need:

Legacy: If you want to leave a gift to loved ones or to charity, how much do you want to give to them, ideally?  Start with that amount and then get estimates for how much this might cost you in monthly premiums.  Then look at your monthly cash flow. Consider how much you can afford to pay each month and adjust as needed.

Remember if you are considering donations to a favorite charity, there are other ways to leave a gift to non-profits. For example, leaving a tax-deferred IRA or 401k to a charity can often benefit both the charity and your estate, from a tax standpoint. If this is in your plan, you might reach out to your favorite charity to see what may best fit their needs.  They may have other suggestions regarding their specific programs.

Indebtedness: What debts will you leave behind?  You probably don’t want your family members to get stuck with a bill they can’t afford after you are gone.  Life insurance can potentially help here, in a big way.  For example, if you have a mortgage, you could purchase term life insurance that would pay off the mortgage should something happen to you. 

Here’s how that works: say you have 20 years left on your mortgage and you have $250,000 outstanding.  You could shop for a 20-year term policy with a death benefit of $250,000 to cover the mortgage.  If you’re reasonably healthy, premiums could be relatively inexpensive.  This concept can be applied to any outstanding loan, or to your entire household debt.

Family: Does anyone rely on you for income? Will anyone be financially stuck if you aren’t bringing home a paycheck anymore?  Another common use for life insurance is to set up an ongoing income stream for a spouse or children. To figure out how much you might need, start with your annual salary times ten. For example, if you make $100,000/year, you would shop for a $1 million insurance policy.  This could be tied to a specific amount of time, say, 20 years if you have young children.  A 20-year term life policy with a $1 million death benefit may be less expensive than you think.  Note: this would probably not replace 100% of your income, but it could create an income stream that would help your dependents.

Expenses: This means “final expenses” rather than day-to-day ones. Again, a topic many people don’t always like to think about, but it’s a real one that needs to be addressed. How will your final wishes be paid for? This can mean burial or cremation, funeral services, and even your final tax return. There could also be medical expenses to consider.  Do you know what your health insurance policy will cover?  Will it be adequate to cover an extended hospital stay or special care?  You may want to consider life insurance to help your survivors pay for these expenses, as well.

I hope this acronym (LIFE) helps you to consider your life insurance needs and what amounts may be appropriate for you. Additionally, I have recorded some short videos about safeguarding your legacy and guidelines on inheritance which you can find on our YouTube channel.

If you have questions or want to chat about this topic, please give me a call or drop me an email. My job is to help you find peace of mind, both for you, and for the legacy you wish to leave behind.

All the best,