Brian Gruss Licensed Insurance Planner

Primary Reasons You Should Own Life Insurance

There are three primary reasons to own life insurance. Life insurance death benefits can be used to replace the breadwinner’s income in the event of premature death, pay future estate taxes for pennies on the dollar or employ special planning strategies.

Using life insurance to replace the primary breadwinner’s income during their working years is a practical necessity, especially when you have children. Unfortunately, there are still many people who fail to protect their loved ones in this way. If you don’t carry enough insurance to replace your income should you die, you could be placing a tremendous burden on your family. This is even more important for single parent households.

A simple rule of thumb to determine if you have enough insurance is to divide your annual salary by .05. For example, if you earn $50,000 per year you should own approximately $1,000,000 in life insurance.

Once you retire you may no longer need this insurance. If you’ve accumulated enough assets to provide comfortably for your lifetime, then life insurance is no longer needed for income replacement purposes. Don’t cancel that policy yet, however, because you may need it for other reasons.

For 2007, an individual can pass $2 million ($4 million for couples) to their heirs free of federal estate tax. If you’ve successfully accumulated more than this amount of assets then you may need life insurance to pay for future estate taxes. Unfortunately, few married couples have the proper plans in place and end up forfeiting one exemption that results in reducing that amount to $2 million.

Life insurance is an excellent way to pay estate taxes without being forced to liquidate assets. This is particularly true when a large percentage of an estate is tied up in illiquid assets, such as a business interest or real estate. In those cases, illiquid assets would have to be sold swiftly at probably less than their true market value to pay the tax bill.

With the proper use of this insurance you can avoid these situations entirely, and plan in such a way that you pay your taxes for pennies on the dollar. If your estate is smaller, you may not need life insurance to help cover future estate taxes.

The third use of life insurance is for special planning strategies. There are unique strategies you can employ to significantly increase the financial support you can provide your favorite charitable causes or to offer a financial safety-net for your loved ones for generations.

Even those of modest means can provide literally millions of dollars to worthy causes, while passing on a legacy of giving to future generations. Very few are aware of these strategies.

If you don’t fit one of these situations you may no longer need life insurance. Don’t take this decision lightly, though, especially if your health has diminished. Depending on your age and health, you may realize more by selling your policy instead of canceling it. Always consult a qualified, unbiased professional prior to canceling your policies to explore your options.

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Figuring Out Your Worth

Most of us like to believe that life is priceless—but in some cases, it’s important to figure out just how much your life is worth. Why would you do such a thing? Because calculating your worth will help you determine how much life insurance you need.

Everyone’s a millionaire

Believe it or not, most people earn more than $1 million throughout their entire lifetime. Think of it this way: If you earn $50,000 a year, you’ll make $1 million within the next 20 years. Of course, most of this money goes toward supporting your family and paying day-to-day expenses like groceries, the mortgage, and utility bills.

If something were to happen to you, your income stream would come to a halt. What would your family do without the money they need to pay the bills and buy necessities? This is why it’s crucial not only to purchase life insurance, but to make sure you have enough insurance to cover all of your family’s needs.

How much do you need?

One way to figure out how much you’re worth to your family is to consider how much income you bring home each month. Then, you can buy a life insurance policy that will pay your family a monthly income that is comparable to what you currently earn.

For example, if you buy a $500,000 life insurance policy and the death benefit proceeds earned 4% annually, your family would receive a monthly payment of about $5,137 for the next 10 years. If you want your family to receive more money each month or payments for a longer period of time, you’ll need to buy more life insurance.

Other considerations

Unfortunately, figuring out how much life insurance you need isn’t as simple as calculating your monthly income. In addition to replacing your income, you’ll need to think about other expenses your family may face if you die. For example, they may have to pay medical bills, hospital expenses, and attorney fees and make funeral arrangements. They will also have to pay off any outstanding debts you may have as well as taxes.

On top of that, you should consider your family’s long-term expenses. Not only will your family be left to pay the mortgage and the bills, but how will your family afford your children’s college tuition or wedding costs? Be sure to factor in any other sources of income your family earns—your spouse’s salary, Social Security survivor’s benefits, and investments—and the cost of inflation. Things become more expensive every year. You want to get a true picture of how much money your family will need in the coming years to accurately determine how much life insurance to buy.

A unique number

Obviously, each family’s life insurance needs will vary significantly. It all comes down to your income, your expenses, and your goals for your family. Finding the “magic number” is a challenge because it’s somewhat of a balancing act. You want to own enough life insurance to adequately protect your family if something happens to you, but you don’t want to buy so much insurance that there’s no money left over to enjoy your life in the present.

The goal is to have enough life insurance to safeguard your family without breaking your budget. If you want to pinpoint just how much life insurance you need to protect your family, meet with a financial advisor or insurance agent. Brian Gruss can help determine how much you need to buy and what you can realistically afford in your budget.

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Know the Facts About Life Insurance and the Proceeds of Your Estate

Everyone needs life insurance, but not everyone has a good understanding of this important type of insurance.  Two of the most frequently asked questions that I get from people are:

#1: Why do I need life insurance?

Although it may seem oversimplified, the answer is: “…everyone needs life insurance.”

If you are wealthy, life insurance proceeds will pay taxes, final expenses, outstanding bills (such as mortgages, car loans, credit cards, etc.) so that your family gets the full value of everything you have spent a lifetime working to accumulate.

Conversely, if you are not independently wealthy, then life insurance is the only vehicle that will “create” an instant estate upon your death that can be passed on to your loved ones. What may have been denied to you during your life time through no fault of your own, despite hard work and effort, you can attain at death with a life insurance policy!

There is nothing else in the financial world that can do for you and your family what a life insurance policy can do, guaranteed, whether you die tomorrow or fifty years from now.

When a loved one or close family friend passes away, there are certain things that need to be done right away in order to be sure that the beneficiary gets the proceeds from the insurance. Begin by carefully checking the person’s files and telephone book for names and contact information of their insurance agent(s). Get in touch with every insurance agent and company with which they had a policy, even if you are not sure it is in force. Speak with their employer’s HR department, both current and previous to determine if there are any insurance benefits in effect. Check the mail for up to a year after the passing for notices from insurance companies about premiums due, etc. Look over the past several years of tax returns for any references to interest received or interest paid from or to a life insurance company. These steps will help you to determine whether you have covered all the possibilities. If you need help locating a life insurance company, check with the state insurance department or A.M. Best Co. Be sure to get several copies of the death certificate since you will need this to file a claim with each company.

#2: How do my beneficiaries (spouse, children) receive the proceeds? Don’t make the critical error of assuming that your beneficiaries will automatically receive your estate!

To start with, most states have very specific guidelines regarding how an estate will be probated if you die without a will. Your spouse/children may not automatically get everything you own. In fact, the state will create a plan for the distribution of your estate if you don’t have a will. If this occurs, the distribution probably will not be what you had envisioned!

Some people believe, “I don’t really have a lot of money, so I don’t need a will to take care of things.”

Incorrect! Estate planning is often thought of as something only rich people need. Of course, the larger the estate the more complex the will needed to handle the distribution, but even a modest estate requires a will to be sure your assets go where you want them to go. And, do not think a simple one page “boiler plate” document will suffice. These wills can often create more problems than they solve. Even a minor error or oversight can negate everything.

Remember, you are not going to be there to make your wishes heard; the only voice you will have is the one in your will or trust, so do not gamble. It is just too important an issue to take chances.  Speak with your insurance agent to make sure your final wishes are documented in full.

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