How Much Life Insurance Does One Need?
Always a debatable question, I know.
What I tell my clients with kids is that they should take their annual income and multiply it by the # of years until the youngest has left the house, typically age 21 when they are done with college.
Clients with spouses but no kids should have their annual income multiplied by the number of years left before the spouse reaches age 65 (post-retirement).
Single individuals may or may not need life insurance, but it never hurts to take out a small perm policy to cover final expenses and burial costs. Single people with considerable debts -- like student loans -- would not be pleased to see their parents shouldering their bills after they're gone.
If I'm dealing with a single and wealthy individual, they may go for a policy which will provide liquidity for estate planning purposes. Sheltered in an irrevocable trust, that policy will reduce that client's taxable estate, hence leaving more for their heirs, like a beloved nephew for instance.
A common misconception out there is that life insurance proceeds are tax free.
They are, but only federal income tax free -- if your estate is valued over the exemption ammount of 1.5 million, get ready to pay the IRS. The government has the right to take up to 48% of anything valued over the exclusion ammount.
The only way to evade the tax is to transfer your estate to your spouse (direct transfer by way of nontaxable gift). However, that only postpones the problem. You heirs WILL pay the tax before any assets are handed down.
Unless you take out an ILIT -- short for "irrevocable life insurance trust."
If your 3 beneficiaries in life are your family, charity, and the government, I can't think of one sane person who'd choose to leave less to their family and more to the Tax Man.
These ideas are not absolutes -- just rules of thumb I use everyday.
One has to take special needs (handicapped children, for ex.), estate taxes, and the future of pensions and social security into account.
Life insurance is a fantastic way to maximize one's future pension income -- insurance agents call it "pension enhancement." The pensioner opts to take the max benefit available to them during their retirement while taking out enough insurance (today) to provide for a spouse. The goal, ultimately, is to recover monies that would otherwise funnel right back into a bloated pension fund.
Not to mention, the soaring costs of a decent college education. A life insurance policy will send junior to college even if a 529's funding is never completed.
Ultimately, life insurance is used to replace lost income.
And that's what those seeking it should focus on.
<< Home