By Gary Brooks, CFP®
As comprehensive wealth managers, we believe that protecting risks through insurance is a foundational element of a financial plan. Investments are important and draw most of our ongoing focus, but without insurance, savings and investments can be lost.
As author Nick Murray writes, “We insure against what can go wrong in order to acquire the luxury of investing for what can go right.”
Before you consider how much you need to save to retire comfortably or fund a child’s education, it’s important to make sure that your risks are protected in case something does go wrong. Unfortunately, we all know someone who has died well before their time. We’re not all as invincible as we like to pretend.
It’s not a pleasant scenario to think about, but not doing so can have serious consequences.
Roughly 70 million adult Americans have no life insurance coverage at all. Many others have employer provided coverage that provides a nominal death benefit—i.e. $50,000 or one or two times annual salary. In most cases, especially with people who are not near the end of their career, this is not enough to provide needed financial security to those left behind.
Consider your needs based on the following three scenarios:
You’re Married With Kids and a Mortgage. Having kids and debt are the most obvious reasons to own life insurance. If you and your income were suddenly gone, would your spouse and kids be okay financially? Life insurance replaces lost income to help make sure those who depend on you will be provided for, no matter what life throws your way. You don’t want to force your spouse to find someone else to help pay bills, save for retirement and put the kids through college. Inexpensive term life insurance can protect against this risk until your family is secure enough to get by without your income.
You’re a Small Business Owner. Life insurance can help protect your business in a number of ways in the event you, your partner, or a key employee dies prematurely. A buy-sell agreement funded with life insurance allows surviving business owners to buy the company interests of a deceased business owner at a previously agreed-on price. Again, relatively inexpensive term life insurance can protect against this risk.
You’re Likely to Owe Estate Tax. If you’ve built significant net worth, a little planning can save a lot of money in estate taxes. Especially if your net worth is relatively illiquid (i.e., lots of real estate or business value) paying the estate tax bill may be difficult. Estate tax payments are due nine months after death. In many situations, affluent individuals can benefit from the use of an Irrevocable Life Insurance Trust (ILIT) to create liquidity at the right time and save heirs and executors a lot of headaches. In this case, a permanent insurance policy may make a lot of sense.
CPA and IRA expert Ed Slott preaches that life insurance is the best leverage of the tax code: “A small amount of money can create huge benefit that is income tax and estate tax free as long as it is set up outside the estate.”
The amount of net worth excluded from estate tax is now $5.49 million per person in 2017. Anything above $5.49 million ($10.98 million per couple) could be exposed federal tax of up to 40% in addition to possibly state estate tax depending on the state the deceased lived in.
To adequately address estate planning needs, it’s important to seek legal advice in the context of an overall financial plan.
How Much Insurance Do You Need?
Decisions about the amount and type of life insurance coverage should come after answering the following questions.
- If I and/or my spouse dies, how much will be required to replace my/our earnings?
- Do I need permanent or temporary coverage?
- Who should be the beneficiary of my insurance policy?
- Should this insurance be held inside our outside my estate?
- What is the financial condition of the insurance carrier?
You can get a general sense of how well you are protected by using this life insurance needs calculator. Or, we are happy to review your situation to see how insurance fits into your overall financial plan.
P.S., After initially posting this article, we saw this interesting table:
The chances of premature death are greater than people realize.
|Chance of a 25-year-old man not living another 15 years||1 in 42|
|. . . . . 35-year-old man||1 in 21|
|. . . . . 45-year-old man||1 in 10|
|. . . . . 25-year-old woman||1 in 83|
|. . . . . 35-year-old woman||1 in 36|
|. . . . . 45-year-old woman||1 in 17|
Source: Human Mortality Database, which combines data from US Census and National Center for Health Statistics 2005
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