How Much Life Insurance Do You Really Need?
How much is your life worth? It’s a question that deserves careful consideration when it comes to determining how much life insurance coverage you need to ensure that your loved ones—your spouse, your children, your aging parents, and any other dependents—will be taken care of in the event of your death.
According to Curt Wilkerson, vice president in charge of individual insurance operations for PSA Financial, “It’s a given that people who have dependents are obligated to buy life insurance, but the question is always, ‘How much do I need?’ It’s a very good question, and one that cannot always be best answered by the old rule of thumb that says that an individual merely needs to replace a portion of their income if he or she dies and leaves a family behind. That’s why a good advisor will work closely with his or her client to address that client’s specific circumstances.
Wilkerson advises those pondering how much life insurance to buy to begin by doing what is called a “cash needs analysis” and an “income analysis.”
The costs associated with funeral expenses, including burial, cremation, and/or disposal of the remains. Included in this category are federal and state death taxes and property taxes that need to be paid immediately after your death, as well as attorney’s fees and any remaining hospital or medical bills. When you die, any debt left behind becomes the responsibility of your family. This includes mortgages, credit card accounts, installment payment obligations, and short-term loans. Even though some clients elect not to have life insurance pay off their mortgage (they wish to keep the tax deduction), a smart life insurance plan will take care of most of the other issues mentioned, to protect beneficiaries. If your beneficiaries rent their home, you might consider including funds to pay the rent for a specified length of time. Many clients want to set up an educational fund to underwrite their children’s tuition at private or parochial K-12 schools and/or college. The amount depends on the tuition of the schools involved, as well as the ages of the children. This is a fund calculated to provide cash when the unexpected happens, such as home repairs, vehicle replacement, and so on. This can include money to pay for childcare, which is especially helpful if the spouse who worked outside the home dies and the remaining spouse—who was caring for the minor child—has to go out to work. “We have a system that helps clients figure out how some of these costs break down, from having to pay for daycare to having to hire someone to take care of incidental repairs in the house,” Wilkerson explains. Once you have determined your cash needs, you must carefully consider your income needs, which are basically how much money your family requires on a day-to-day basis. “You have to think about whether you wish to be able to replace 100 percent of your salary, or whether your dependents can get by on less than that,” Wilkerson says. “We do encourage our clients not to consider going below 70 percent of the income they currently make, even though many people think they can get by on 50 percent.”
Next you must consider whether you have any other direct income, such as rent from properties, unearned income, 401(K) accounts, retirement income, Social Security and so on, and factor those in, he says. “We add together the results of the cash analysis and the income analysis and see where we are," Wilkerson explains. “As you can see, figuring out how much life insurance you need is far more complex than just saying you need to replace your income, or part of your income.” That’s why working with an advisor on your particular case is so important. Every single survey shows that the majority of the public is underinsured. Prudent planners don’t want this to happen to them.
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Curtis D. Wilkerson , ChFC
T: 443-798-7318
Em: curtis@psafinancial.com
Area of Specialty:
Business insurance & planning, estate planning and family wealth preservation. (More) |
