Wednesday, May 11, 2011

Your Survivors’ Needs

The next step in determining how much life insurance you should buy is to decide just how much your survivors need. You need to account for four expenses that your survivors will need to cover:

  • Estate taxes
  • Probate Costs
  • The Cost Of Dying
  • Planned Future Expense
Estate taxes
Depending on the size of your estate, your heirs may have to pay taxes on the amount they inherit. If your entire estate goes to your spouse, he or she faces no tax consequence, regardless of the estate’s size. 
If, however, your estate goes to other beneficiaries and your estate is larger than the amount allowed under the tax law, your heirs have to pay taxes on the balance over those amounts. Although the 1999 figure of $650,000 may seem

huge to you, many people own homes that have increased in value so much that the equity in their home is over the limits allowed by federal inheritance tax law. In these types of situations, heirs may have to pay a significant sum in taxes. Quite likely, they won’t have the cash or other liquid assets to pay the estate taxes, particularly if the inheritance is in a form that they can’t easily convert to cash. In that case, they either have to sell the asset or pay the estate taxes from other sources.

You can help your heirs pay the inheritance taxes by buying a higher amount of life insurance (and thus a higher death benefit). Be sure to include an amount to cover the estate taxes when you complete the worksheet to determine the amount of protection you need.

Probate is the process by which your estate is accounted for, all debts and taxes are paid, and whatever is left over goes to the rightful heirs. At this point, your will is officially registered and the executor of your estate is given the legal right to dispose of your assets.

Many executors choose to get assistance from an attorney to handle the financial affairs (although doing so isn’t required). Depending on the size of the estate, an attorney may charge $2,000 to $3,000 to handle probate. You may want to increase your life insurance death benefit by that amount to take care of the probate expenses.

Dealing with estates and probate can sometimes get fairly complicated. Speak to an attorney before handling them yourself.

The cost of dying

The cost of dying refers to the expenses of funerals, burials, and the disposal of your body. How much you pay for these expenses is more than likely up to your survivors. The cost of funerals varies enormously. But on average, burials cost between $5,000 and $10,000. Cremations cost considerably less, from $2,000 to $5,000. When determining the amount of life insurance to purchase, consider including an amount in the death benefit that can cover the cost of the funeral.

Talk with your spouse, if you have one, or to your parents if they are your survivors, or your children if they are old enough, about funeral expenses. This conversation may not be easy, but be persistent so that they can honor your wishes (and make theirs known) should you die.

Many funeral homes won’t require payment directly from your survivors but will allow and will help you arrange to be paid directly from the life insurance proceeds.

Future expenses

When calculating the needs of your survivors, building in expenses that you know will occur is extremely important. These expenses are usually the largest factors in determining how much insurance to buy.

One of the most obvious of these planned future expenses is the cost of attending college. Build in a cost of about $80,000 to $100,000 per child in today’s dollars. Of course, the actual amount your child needs will probably be considerably more later on, which is taken into account with the inflation factor in the worksheet or in the insurance policy.

The amount of life insurance you buy now is the amount your survivors need if you die soon. If you’re worried about inflation eating into the death benefit, you can buy an insurance policy in which the death benefit increases in value.

You may be aware of other expenses that your family will incur, such as orthodontia, summer camps, special classes for your children, or special medical needs. You should build these expenses into the worksheets.

Additionally, you can count on at least one or two of those unexpected expenditures that come up, including a new roof for the house, a new car, and medical emergencies for which your health insurance doesn’t pay the entire cost. When you complete the budget worksheet, build in some “fudge factor” — about 10 percent of your annual income is good — to account for these unplanned costs.

Age — Yours and Your Survivors’

One of the determinants of how much life insurance to buy is age — your age and the age of your survivors.

Life expectancy
The amount of insurance you purchase depends very much on your life circumstances, what your style of living is, how much your survivors need, and what lies ahead for your beneficiaries.

If you are 30 years old and in good health, the chances are great that you will live another 50 years or more. As medical advancements continue, your life span may be even greater, assuming that you’re not hit by that proverbial truck.

Your life span affects your life insurance needs in these ways: 
  • The younger you are, the longer your survivors are going to need income replacement, the more dollars you need to put away for future expenses such as your children’s education, and the more likely it is that your living expenses are lower.
  • The older you are, the less chance your spouse has to plan for his or her retirement, the less likely it is that your survivors will have to depend on you to fund a college education, and the more likely your spouse is to need medical, skilled-care assistance, or nursing home care.
Cost of premiums
The age at which you buy life insurance relates directly to the cost of your premium (the amount you must pay for the coverage). The younger you are, the cheaper the premium. A 38- year-old male buying a five-year, term life insurance policy with a death benefit of $100,000 may pay only about $175 per year, while a 48-year-old may have to pay about twice that amount for the same coverage.

If, however, that 38-year-male old wants to buy a cash-value life insurance policy — one that not only provides a death benefit when he dies but also builds some value that he can use when he retires (or that adds to the death benefit) — he may have to pay about $600 a year, about three-quarters of which goes into his cash-value account.

When determining how much life insurance you need, you have to take into account how much life insurance you can afford. The cost of insurance goes up every year as you age because your life expectancy is lower and the insurance company knows it has fewer years before you are expected to die. Decide how much you can afford to pay per year and work with that amount to determine how much life insurance to buy.

One way to estimate how much your premiums will be in five or ten years is to find out what the premium would be now if you were five or ten years older. Doing so gives you the price in today’s dollars. You can add about 15 to 20 percent more for five years and about 40 to 50 percent more for ten years to account for inflation.


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