Brian Gruss Licensed Insurance Planner

As Your Income Grows, So Should Your Life Insurance Coverage

Most people fail to realize that when they accomplish goals like earning more money and achieving a higher standard of living, they increase their need for life insurance. That’s because life insurance provides support for your dependents if you die prematurely. It allows your family to maintain the same standard of living they have become accustomed to, even after you die.

Just think of the many ways your family depends upon your income and what would happen if it were suddenly taken from them with no replacement. If you have a stay-at-home spouse, they may need the death benefit proceeds from a policy to pay the mortgage or save for your children’s education. The money your spouse receives from the death benefit can help them continue to care for your family in the interim while looking for a job. Without that financial cushion, your spouse might have to sell the house or your children may have to delay going to college.

To be sure that you adequately provide for your dependents, you should increase your life insurance as your salary increases. The ratio between your coverage amount and your salary decreases, as your salary gets higher. So if you begin with a policy providing a death benefit equal to ten times your salary, by the time you reach 50 years old and are earning twice as much money, the coverage amount will have decreased to only five times your salary.

And don’t think that once you turn 65 and your children are grown, you no longer need life insurance. Remember, most people live up to every penny they earn. As their income increases, they tend to increase their standard of living via expensive new homes or cars, so that at age 65, many of them could still conceivably be carrying mortgages or auto loans. In order for the surviving spouse to maintain their current lifestyle, the insured would have had to increase their coverage to keep pace with their spending.

There is also the issue of longevity. Today people are living into their eighties and beyond. If the insured dies at 65, the surviving spouse could live another twenty to thirty years, in which case they would need the death benefit proceeds to cover living expenses.

It is clear that there is a real need to have your life insurance keep pace with your salary. You should review your life insurance annually with your agent, Brian Gruss, to develop a plan to ensure your dependents will remain financially comfortable after your death.

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Maximize Life Insurance Benefits for Your Heirs

Any financial expert will tell you that if you have a family who depends on your income, a life insurance policy is a must-have. Without life insurance, your family may find themselves in a financial crisis if something happened to you. An effective life insurance plan will ensure that all of your family’s financial needs will be covered in the event of your death—from the monthly mortgage to final expenses to your child’s college education.

Plus, life insurance can offer your family a tax-free death benefit that far surpasses the premiums you pay for the policy each month. However, there’s a catch: if you don’t properly set up your life insurance ownership and beneficiary designations, much of the proceeds from your policy may be severely taxed, leaving your loved ones with very little.

Here are three important tax facts to keep in mind as you structure your life insurance policy:

1. Don’t name yourself or your estate as the beneficiary:

Everything that you own may be subject to federal estate tax when you die, and this must be paid from your estate. However, this tax generally will not be imposed if your property is valued at less than your estate tax exemption amount upon your death. (The federal estate tax exemption amount is $2 million in 2008 and will increase to $3.5 million in 2009.)

However, if you own a life insurance policy with you or your estate named as the beneficiary, this will increase the value of your estate. If this pushes the value of your estate in excess of the exemption amount, the entire death benefit of your life insurance policy could be taxed. Consequently, your heirs could be left with very little or nothing at all.

Therefore, if you think you could be affected by estate taxes, you’re probably better off making someone else the owner and beneficiary of your life insurance policy. For example, you could establish an irrevocable trust as the owner and beneficiary of the policy. On the other hand, you could set it up so that your grown children are the owners and beneficiaries of the policy. Either option will ensure that the proceeds from your insurance policy will not be included in the value of your estate.

1. Name a contingent beneficiary:

If the beneficiary you named on your life insurance policy dies before you, and you die shortly thereafter, the proceeds from your policy may be paid to your estate. Once again, this will raise the value of your estate, increasing the odds of estate taxes and the risk of your life insurance death benefit being fully taxed.

This is why you should name at least two contingent beneficiaries on your insurance policy. That way, if the first beneficiary dies before you, the death benefit from your policy will be paid to directly to the next beneficiary in line, which will avoid the risk of probate and estate taxes.

1. Understand gift taxes:

Any life insurance that you give to a third party other than your spouse may be subject to gift taxes. If you don’t survive this gift by three years, the policy will be brought back to your estate—which once again, increases the value of your estate and with it the risk of estate taxes. Therefore, if you are considering transferring a life insurance policy to a third party, you should consult with a tax or legal professional first to avoid these tax snares.

There’s no question that life insurance and estate taxes can be extremely complex and difficult to understand. That’s why you should work closely with a financial professional to ensure you make the right choices when it comes to setting up your life insurance policy. Otherwise, your heirs may not receive the death benefit they rightly deserve.

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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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