August 5, 2020
Life Insurance Needs Analysis
As we continue to navigate through these uncertain times, filled with new challenges and concerns, having a dynamic wealth management relationship with a professional advisor has never been more important. A good financial plan should cover every facet of financial planning including life insurance, which can be an important and foundational element to financial wellbeing. Life insurance should typically be thought of as a financial safety net that can protect your family and loved ones against the financial burden of a premature passing. Greenleaf Trust does not sell insurance products, but we offer considerations to our clients regarding appropriate coverage and acceptable terms. We frequently work with third party insurance agents to analyze and select appropriate funding vehicles for coverage.
When determining the appropriate amount of life insurance for those who are in their accumulation years, we typically focus on four key areas: outstanding liabilities, replacement of income, final expenses and funding of higher education. While there are certainly other reasons to invest in life insurance, these four considerations are explored below.
Outstanding Liabilities
Leaving behind debts could be a significant burden for those who are left to settle your estate. In some cases, paying those debts can result in additional taxes or hardships if adequate insurance is not in place. When looking at this area of consideration, we typically recommend having enough life insurance coverage to pay off existing debts.
Replacement of Income
Life insurance proceeds often need to replace income for surviving spouses and/or dependents. It is important to have an understanding of your existing cash flow needs before completing this analysis. By taking your estimated annual spending and performing a present value calculation on the annual need over a period of years and an expected effective investment return on the proceeds, you can determine an approximate lump sum needed to fund future living expenses. As the future return of the market is unknown, it is important to analyze a variety of growth rates for the reinvestment of life insurance proceeds.
Final Expenses
Final expenses for funerals can range anywhere from a few hundred dollars to tens of thousands of dollars depending on your wishes. It is important to communicate your final wishes with your loved ones and plan appropriately with your insurance coverage to pay for a portion or all of your final expenses.
Education Expenses
For many, funding higher education for dependents or future generations is an important goal, and one that can be funded through life insurance proceeds. By performing a similar calculation to the replacement of income consideration, you can determine the appropriate amount to fund. There are a variety of funding vehicles that could be used to meet this goal, and it is important to take those into consideration as you are performing this analysis.
There may be other reasons to purchase life insurance, including providing liquidity for estate tax situations or for additional financial security. There are also variety of products that could be used to meet your goals, including term life, permanent policies, or even riders attached to long-term care policies — to name a few.
What is the Appropriate Amount of Life Insurance to Have?
The appropriate amount of life insurance comes down to making sure your goals can still be met if you were to pass away prematurely. While this subject may be difficult to think about, it is critically important to consider and plan for. If you have questions about life insurance planning, please reach out to a member of your client centric team and we will help you refine your goals and analyze the options to meet them.