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Life Insurance–How Much Is Enough?

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Life Insurance–How Much Is Enough?

You are probably aware of the importance of having enough life insurance coverage to h andle the financial contingencies that may affect your family in the event of your death. However, determining the necessary amount of life insurance can be complicated. One general rule of thumb is that you should have enough coverage to equal five to seven times your annual salary. However, you may want to determine the “right” amount of life insurance coverage with a 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 leads to planning insurance coverage to help address mortgage debt, college expenses, and future family income, as well as to provide liquidity for meeting future estate tax liabilities.

Mortgage Debt

The first point worthy of consideration is whether your life insurance proceeds will be 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, that mortgage should also be factored into the formula.

College Expenses

Many people want life insurance proceeds large enough to help cover their children’s college expenses, and possibly, graduate school. The amount needed can be roughly calculated by matching the ages of your children against projected college costs adjusted for inflation. This calculation should be revised periodically as your children get closer to college age, and it may be a good idea to be as conservative as possible when estimating long-term savings goals.

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 age, health, retirement plan benefits, Social Security benefits, other assets, and your spouse’s earning power. Many surviving spouses may already be employed or will find employment, but your spouse’s income, alone, may not be sufficient enough to cover the monthly expenses of your family’s current lifestyle. Providing a supplemental income fund can help your family maintain its st andard of living.

Estate Taxes

Life insurance has long been recognized as an effective method for establishing liquidity at death to pay estate taxes and maximize asset transfers to future generations. However, this use of life insurance requires qualified legal expertise to help ensure the proper results.

Existing Resources

If your current assets and retirement plan death benefits are sufficient to cover your financial needs and obligations, you may not need additional life insurance for these purposes. However, if they are inadequate, the difference between your total assets and your total needs may be funded with life insurance.

There are many factors to consider when completing a needs analysis. In addition to the areas already mentioned, some other questions you might want to address include the following:

1. How much will Social Security provide and for how long?

2. How do you “inflation-proof” your family income, so the real purchasing power of those dollars does not decrease?

3. What is the earning potential of your surviving spouse?

4. How often should you review your needs analysis?

5. How can you use life insurance to help provide retirement income?

6. How do you structure your estate to reduce the impact of estate taxes?

7. Which assets are liquid and which would not be reduced by a forced sale?

8. Which assets would you want your family to retain because of sentiment or future growth possibilities?

As you develop an insurance strategy, remember to analyze your existing policies. Calculate the additional coverage you may need based on your family’s financial obligations and any other resources, such as retirement benefits and savings. Remember, having the proper life insurance coverage can play a major role in any family’s financial protection.

MetLife, its agents, and representatives may not give legal or tax advice. Any discussion of taxes herein or related to this document is for general information purposes only and does not purport to be complete or cover every situation. Tax law is subject to interpretation and legislative change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the facts and circumstances. You should consult with and rely on your own independent legal and tax advisers regarding your particular set of facts and circumstances.

Copyright © 2010 Liberty Publishing, Inc. All Rights Reserved.

L0410101464(exp0411)(All States)(DC)

This article appears courtesy of Karl Susman.  Karl Susman is a representative of the New Engl and Life Insurance Company. He focuses on meeting the individual insurance and financial services needs of people on the West Coast.  You can reach Karl at the office at (424) 785-4337. New Engl and Life Insurance Company, 501 Boylston Street, Boston, MA 02116

Your Estate and Life Insurance: It All Adds Up

It’s easy to underestimate your net worth. After all, without a crystal ball, the future value of your home and savings is hypothetical. What’s not hypothetical, however, is the fixed amount of the death benefit provided by your life insurance policy. Adding this often significant sum to your asset pool could expose your estate to Federal estate taxes. Fortunately, there are trusts that can exclude life insurance from an estate.

Many people assume that because death benefit proceeds from a life insurance policy are generally not considered taxable income to the beneficiary, a life insurance policy is out of the reach of the Internal Revenue Service (IRS). However, when the policy’s death benefits are added to the appreciated value of your home and savings, it may come as a shock to find that the value of your estate may exceed the applicable exclusion amount.

Taxpayers should be aware that, under current law, Federal estate taxes are repealed in 2010. However, according to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), estate taxes will be reinstated in 2001, with an applicable exclusion amount of $1 million and a top tax rate of 55%. Congress may retroactively change the rules before the end of 2010, reinstating the estate tax at the same or new levels.

Although the unlimited marital deduction allows spouses to transfer assets to each other without assessment of estate taxes, non-spousal heirs face the possibility of seeing a life insurance policy inflate an estate’s value past the scheduled exemption amount in the year of death.

One Strategy: A Credit-Shelter Trust

One way to protect life insurance policy proceeds from estate taxation is to use a type of bypass trust known as a credit-shelter trust. This trust can be established during life, even if left unfunded, or at death through a will.

For estate conservation purposes, a trust could be set up to maximize each spouse’s applicable exclusion amount, perhaps sheltering more assets from estate taxation than may be possible through use of just the unlimited marital deduction. At the death of one spouse, an amount equal to his or her applicable exclusion amount could pass to a trust to benefit the surviving spouse but intentionally designed not to qualify for the marital deduction, with the remainder of the assets passing outright to the spouse. Then, at the death of the surviving spouse, assets in the credit-shelter trust could be paid to the couple’s children—without being subject to Federal estate tax. Any assets outside the trust upon the surviving spouse’s death, and therefore potentially subject to estate tax, could be further sheltered by the second spouse’s applicable exclusion amount for that year.

Another Approach: An ILIT

Especially when children are intended to receive the proceeds of a life insurance policy and the owner wants to exempt the policy from the estate’s total worth, an irrevocable life insurance trust (ILIT) is another approach. In this case, the trust is the owner and the beneficiary of the policy. Keep in mind, however, the term “irrevocable” means beneficiaries may not be changed and loans for the benefit of the insured may not be paid out from the policy once it is put into the trust. Putting a hefty life insurance policy into such a trust could help beneficiaries finance the purchase of a family business or pay estate taxes. However, funding an ILIT may result in gift taxes due.

Park Your Policy in the Right Spot

A trust, depending on the type, can help reduce or defer taxes on high-value assets such as life insurance. More broadly, a trust can be the means to help ensure the policy’s benefits go directly to the intended beneficiary. With the flexibility of trusts, however, comes complexity. It is always best to consult with an estate attorney who is experienced in tax matters before proceeding.

MetLife, nor its affiliates, their agents, and representatives, may not give legal or tax advice. You should consult with and rely on your own independent legal and tax advisors regarding your particular set of facts and circumstances.

Copyright © 2010 Liberty Publishing, Inc. All Rights Reserved.

L0310095214(exp0311)(All States)(DC)

This article appears courtesy of Karl Susman. Karl Susman is a representative of the New Engl and Life Insurance Company. He focuses on meeting the individual insurance and financial services needs of people on the West Coast. You can reach Karl at the office at (424) 785-4337. New Engl and Life Insurance Company, 501 Boylston Street, Boston, MA 02116

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