November 16, 2015
If something were to happen to you, would your family have enough life insurance to continue living the way they do today? Some experts say many families need 70%-90% of their current gross income1 if something were to happen to the breadwinner. While a sobering topic, it is very important and can help your family in a time of need.
As your financial situation changes it's important to check your life insurance needs.
- Having children
- Sending children to college or private school
- Getting a promotion or new job creating a change in salary
- Buying or selling a home creating a change in mortgage expenses
It's helpful to think of your life insurance in terms of the income it can provide.
Your Investment Professional can help you with a customized strategy designed to help you anticipate the many options if you were to die. You'll want to consider immediate expenses, income replacement and available assets.
As a starting point, the average cost of a funeral in 2012 was approximately $7,0002. There might also be probate fees or other funeral costs.
If your family will keep your home, you will need to figure in the remaining cost of your mortgage, insurance, taxes and maintenance. If your family will sell, think about the cost to rent or what a new mortgage would be. Remember, selling a home may trigger capital gains taxes. Consult your tax advisor regarding your circumstances.
Next, take a look at your credit card debt, car loans, education loans, and other outstanding liabilities. Think about unexpected emergency costs like income lost due to work absence, medical expenses or home repair.
If your children are going to college, this is the last item to set aside for immediate expenses. You will also want to figure in the cost of future college education for younger children3.
You will want to replace the income you would have been earning for your family. You will need to take a look at how many years your family will need support and the average rate of return on investments.
If your retirement savings can be liquidated, it might provide cash flow for your family. These can include an IRA, 401(k), annuities, and other retirement accounts. If your retirement plan allows, your survivor may receive a single payment of the entire balance (fully taxable to the survivor) or roll over the entire balance into a traditional IRA to continue the potential of tax-deferred growth.
Contact your Financial Advisor and tax advisor for more information.
For most families, Social Security provides only temporary benefits. Become familiar with how long your family would be eligible for benefits. The time and the amount of benefit might be so small it is not worth including in your calculations.
Take a close look at what your family could choose to liquidate, including any stocks, bonds, savings accounts, etc.
What other assets do you have, including inheritance, commodities, rental property, etc.?
If you own rental property or a vacation home, your family might keep it or sell it. If kept, all related expenses will need to be calculated just as with a primary residence, including mortgage payments, insurance, taxes, and maintenance. If sold, there will be selling expenses and taxes due upon sale.
Your Investment Professional can help you take a look at your current standing and develop a customized strategy specific for planning for your family. This is just a starting point for discussion and planning of life insurance needs.
As always, having a plan creates a better chance of achieving your financial goals and ensuring that your loved ones are cared for when you are no longer able to care for them.
1 2008 Replacement Ratio Study TM, Aon Consulting
2 2012 National Funeral Directors Association, http://nfda.org/about-funeral-service-/trends-and-statistics.html
3 Total yearly costs for in-state tuition, fees, books, room and board, transportation, and miscellaneous expenses.
Source: Trends in College Pricing. (C)2013 collegeboard.com, Inc. Reprinted with permission. All rights reserved. collegeboard.com.
Caroline Hill, Financial Advisor
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).