Recent events have made many of us think about our mortality and how to make sure our loved ones are taken care of especially if we die unexpectedly. Life insurance can be an affordable way to provide for our children, a spouse, a sibling, aging parents, and other loved ones. Life insurance can provide heirs numerous benefits: extra income to help pay ongoing household bills; funds to pay off a mortgage, credit cards and other debt; money to pay for college, or money to pay funeral costs and other final expenses. For business owners, life insurance also plays a vital role in business succession planning.
A simple way to determine the amount of life insurance needed for income replacement purposes is to multiply the annual income to be replaced by the number of years it will be needed. If the insured is earning income, use the amount contributed to the household (after personal expenses and taxes). If the insured does not have income (perhaps a stay-at-home parent or caregiver), determine how much will be needed to pay someone to take over those responsibilities. For example, a dad who wants enough life insurance to replace his income for 20 years (until his children have completed college) would take the amount of annual income he wants to replace and multiply that by 20. He may want to add enough to pay for college and other expenses. The total amount is how much life insurance he needs. This is called the “face value” or “death benefit.”
Generally, there are two kinds of life insurance: term and permanent. Other “hybrid” life insurance policies can provide additional benefits, like long term care, however, this article will focus on general life insurance policies.
Term life insurance provides coverage for a set number of years or term. It can be a good choice when coverage is needed for a certain number of years; for example, until the kids are out of college or the mortgage is paid off. It is also less expensive than permanent life insurance and is least expensive when the insured is young and healthy. For these reasons, term life insurance is often a popular choice for young families.
Permanent life insurance, on the other hand, does not expire at the end of a specified term as long as the premiums are paid. Generally, the coverage stays in effect during the insured’s lifetime. The premium can either stay the same or fluctuate based upon the financial performance of the policy. Permanent policies also build cash value over time that can be borrowed from the policy can be used to help pay the premiums, or can be refunded if the policy is canceled. Any money borrowed will be charged against the proceeds paid at the insured’s death.
The amount a family pays for life insurance must be a reasonable and manageable expense. The cost will depend on the amount, kind (term vs. permanent), and the age and health of the person to be insured. If the cost to replace income for 20 or 30 years is too much for the family budget, one option is to cover five to seven years of expenses, which will give the family time to cope and adjust after the loss.
Incorporating life insurance into an estate plan can be vital to making sure family and loved ones are taken care of. We welcome the opportunity to help you with your planning, and to help you achieve peace of mind for you and your family.
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Patrick Kelleher is an author and Estate Planning & Elder Law attorney and founder of the elder law care learning center in Hanover, Massachusetts. Patrick has been teaching free educational workshops for over 10 years at his learning center and surrounding communities. Learn more at elderlawcare.com or follow Patrick Kelleher on Facebook because you will learn a lot! Offices in Hanover and Quincy. You can find Patrick’s new book “How to Avoid the Four Headed Monster” of Estate Planning & Elder Law on Amazon at https://www.amazon.com/How-Avoid-Four-Headed-Monster-Financial-ebook/dp/B084MB96SK
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