A comprehensive financial plan often includes an insurance and risk management analysis. This analysis will help define your cashflow needs and lifestyle expectations, and it will help you to determine how much (if any) life insurance you will need to meet your family’s future financial needs. The challenge may be figuring out how much you need, where to buy it, what kind to purchase and which company to buy it from. Your life insurance needs analysis that should consider future expenses, such as college costs, paying off outstanding debt, potentially providing some type of income replacement and caring for young children, to name a few.
While we recommend purchasing life insurance in the context of your overall financial plan, a general rule of thumb historically has been to purchase 10 times your annual salary. This high-level calculation may result in being over or underinsured.
The more accurate way to predict your life insurance needs (and how we, at Seaside Wealth Management, approach life insurance needs analysis) is to take a deeper dive into your finances and consider all your income and expenses. This process can be a bit more complex, however it is more accurate and will avoid you having to pay for unnecessary insurance coverage. We encourage you to reach out to us to discuss your life insurance needs further.
If you have life insurance policies currently, it is important to review the terms of the policies each year to ensure that your coverage is adequate with your current stated goals. It is also important to review the beneficiaries on your policies. In addition, research whether you have life insurance coverage offered through your employer for yourself and your family. Keep in mind that these policies typically end with your employment, but sometimes they are portable. You should reach out to your employer sponsored life insurance carrier for details.
An important detail to consider regarding existing life insurance is when is a good time to drop your coverage if you no longer need it. For example, a strategy often used in estate planning is purchasing a life insurance policy to satisfy an estate tax liability at death. In the past, estate taxes would be paid on any amount inherited over $1,000,000. The estate tax used to be as high as 50%. A permanent life insurance policy was a good tool to help surviving beneficiaries pay the steep estate tax. With today’s much higher exemptions ($11,580,00 per person in 2020) fewer people are affected by the estate tax rendering many permanent life insurance policies not as useful. Giving up a life insurance policy is not an easy decision and should be reviewed in conjunction with your overall plan. If this is something you are considering, please feel free to give our office a call.