LIFE INSURANCE REPLACES INCOME OF DECEASED AND PAYS OFF DEBTS– DO I HAVE ENOUGH?

It is common for clients to tell me that they don’t need life insurance or to say the they have enough.  When asked what is enough, they start to hesitate.  For good reason!  You need to know what life insurance is insuring before you can state blithely that what you have is sufficient.

Here is how it works, generally.  You want to have enough life insurance to cover key debts or expenses AND to replace the income lost that the decedent will no longer be bringing into the family.  A good way to ballpark your need is to calculate a return on the investment of the face value of the policy.  A $1,000,000 policy, invested at a return of 5%, will replace $50,000 of income lost.  If you make $100,000, you will need 2 million dollars in coverage.  If you make $200,000, you will need 4 million dollars in coverage, and so on.

If you have a mortgage, you may want to pay it off with the insurance pay out and invest the remainder.  If you have college expenses, you want to calculate the investment to cover those.  You get the idea.

Remember, that if you own the life insurance in your name, as opposed to owning it in an irrevocable trust that has its own tax id number, it may make your estate taxable.  You will need to consider whether the face value adds to your overall estate value so that it makes your estate exceed the amount the federal government says you have without incurring an estate tax.  That will depend on the tax laws in place at the time of your death.

There are lots of considerations.  It is wise to speak with your estate planning attorney and your life insurance specialist to make sure that you are adequately covered.