I’m often asked about life insurance. Should I have life insurance? If so, how much? What kind is best? These are all great questions. As a financial planner, I’ve seen life insurance make or break a family in transition after a loss. It is not a fun thing to think about, but it can be extremely important, so it is worth taking the time and discomfort to think about it.
Here are some basics you need to know:
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
How much insurance?
Key: WHAT’S THE GOAL? (Refer back to the above Reasons: LIFE)
Rather than picking a nebulous amount, it is smart to tie the amount of insurance to a particular goal or need. For example:
Legacy: If you want to leave a gift to loved ones or charity, how much ideally do you want to gift? You can start with that amount and then get premium estimates. Next, look at your monthly cash flow and consider, how much can you afford to pay each month? If you are charitably minded, keep in mind there are other ways to leave a gift to your favorite charity. You might consider talking to your favorite charity to see what may best fit their needs. They may already have programs in place which you can become a part of.
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. For example, if you have a mortgage, you could purchase term life insurance to pay off the mortgage. Here’s how that works: say you have 20 years left on your mortgage and you have $100,000 outstanding. You could shop for a 20-year term policy with a death benefit of $100,000 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: What about ongoing income? In other words, 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. A rule of thumb here is to start with an amount that is 10 times your annual salary. For example, if you make $100,000/year, you would shop for a $1 million insurance policy. Again, this could be tied to a specific amount of time, say, 20 years if you have young children. A 20-year term 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 be significant to your dependents.
Expenses: Finally, a topic many people don’t like to think about, but again, an important one. How do you want your remains to be handled? Do you prefer burial or cremation? How will that be paid for? A quick online search found that the average cost of cremation (no service) is approximately $1000, while the average traditional burial cost is upwards of $4000 (varies by city). There could also be medical expenses to consider. Do you have an idea of what your health insurance policy covers? 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 in thinking about your life insurance needs, and what amounts may be appropriate to look for. If you have additional questions or want to chat, please give me a call! In Part 2 next month, we’ll look at the different types of life insurance and attempt to demystify this important coverage. Until then, stay safe and take care!
Shadowridge Asset Management, LLC does not offer tax planning or legal services, but may provide references to accounting, tax services or legal providers. They may also work with your attorney or independent tax or legal advisor.