Life Events

Life insurance exists to replace income and cover obligations if you die. Deciding how much to buy, and which type, comes down to who depends on you and for how long.

Start with who relies on your income

If no one depends on you financially, you may need little more than coverage for final expenses and debts. If you have a spouse, children, aging parents or a business partner, you likely need more. Needs typically peak when children are young and your mortgage is large, then decline as debts shrink and savings grow.

Estimating how much

There is no single formula, but a needs analysis is a sound approach. Add up:

• Income your family would need to replace, and for how many years.
• Debts to pay off, such as a mortgage or loans.
• Future costs such as college and childcare.
• Final expenses and any estate settlement costs.

Then subtract the resources already available, such as savings, investments, employer-provided coverage and survivor benefits. The remainder is your coverage gap. Rules of thumb based on a multiple of annual income are a starting point only.

Term insurance

Term insurance covers a set period, such as 10, 20 or 30 years. It costs much less than permanent insurance for the same death benefit, and it fits a need that ends, such as raising children or paying off a mortgage. When the term ends, coverage ends, or it continues at a much higher price.

Permanent insurance

Whole life, universal life and similar policies cover you for life as long as premiums are paid, and they build cash value. They cost more and are more complex. They can make sense for lifelong needs, such as providing for a dependent with special needs, estate liquidity or certain business arrangements. Compare fees, guarantees and surrender charges carefully, and ask how the policy performs if returns fall short of the illustration.

Tax points

Death benefits are generally income tax free to beneficiaries. They may be included in your taxable estate if you own the policy, which is something an irrevocable life insurance trust can address. Borrowing against or surrendering cash value can have tax consequences.

Practical tips

• Buy while you are healthy, since price depends on age and health.
• Review beneficiaries after any marriage, divorce or birth.
• Compare quotes from several insurers and look at the company's financial strength.
• Be skeptical when insurance is pitched mainly as an investment.

To see how coverage fits into your larger plan, contact our office.