A Crisis of Coverage…

When it comes to life insurance, most believe coverage provided by an employer is adequate. For instance, as part of a basic benefits package, employers offer a group (term or whole) life insurance policy. This policy may show a multiple of the employee’s salary. To decide if the coverage amount is enough, most are less inclined to “consider the calculus”.

While pondering life insurance coverage amounts, the following are five essential categories:

Pay off debt: Instead of debt burdens passed to heirs (and risk creditor litigation), life insurance products can pay off debt; as in mortgages, student loans, credit cards, car loans etc…

Fund future needs: To help educational pursuits for his (or her) child(ren), because of inflationary pressures and rising costs of college; contributing to a 529 College Savings Plan (and relying on those contributions) to exponentially grow may not be adequate. Life insurance products answer this need.

Income for survivors: When purchasing life insurance, one need consider how to replace income earned from employment. Few consider the continuing income needs of heirs or a surviving spouse. For instance, income needs includes costs associated with childcare, utilities, food and home maintenance. Yet, without an adequate life insurance plan, a surviving spouse carries the added challenge of finding ways to replace income and keep a standard of living.

Pay final expenses: At the passing of a loved one, beyond the emotional and physical toll, a financial cost stays. For instance, funeral, legal, any associated hospitalization care expense; estate tax and other ancillary costs need be paid. Life insurance is the proven financial vehicle to address final expenses, protect assets and ease the seamless transfer of wealth.

Leave a legacy: When asked, most want to leave his (or her) family in a better financial position. This want extends to charitable contributions that have local impact. The tax advantaged proceeds from a life insurance product carries the ability to offer a large infusion to both family and one’s charitable interest(s).

Using estimates and national averages, the following is an exercise used to find a correct assessment of life insurance needs:

Loans: (Student, $89K outstanding) + (Mortgage, $309K balance owed) + (Automobile, $56K for 2.28 cars owned) = $454,000

Income: (Household Income, $68K per year) x (20 years of minimum expected life span after retirement) = $16, 320,000

Final Expense: (Funeral expense, $14K) + (Estate tax, $4K) = $18,000

Education: (College Tuition, $28K per year) x 4 (3.18 Children in household) = $356,000

Total Life Insurance Need = $17,148,000

Admittedly, seventeen million dollars in life insurance is considered an unrealistic expectation. Still, if applied, life insurance; plus, other financial vehicles can adequately address future income needs. Yet, within this calculus, if we were to remove the “Income” part, the balance reflects a minimum of $828,000 (or 1 Million) coverage amount. Nonetheless, the average American household has approximately $160,000 in “face value” life insurance.

Life insurance is the foundation of proper financial planning. More important, the calculation and understanding of one’s true life insurance value need be understood. Still, in determining adequate coverage, because needs change, a periodic and comprehensive review of the current policy is a prerequisite.

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