September 21st, 2017
We don’t think twice about insuring our cars and homes because we’ve worked hard to earn them and clearly understand how much they are worth. The value of what it would cost if we needed to replace them is clear. But, life insurance? How do we put a price on what our earnings potential is now and in years to come? Frisch Financial Group is here to help you answer these questions to better secure your family’s future.
While insuring something like a car or jewelry is a fairly simple process, determining the amount of life insurance you need can be a little more complicated. If you are your family’s main provider, there can be many factors to take into consideration when estimating their financial needs in the event of your death. Mortgage payments, retirement savings, funding for your children’s education and maintaining your family’s current lifestyle all need to be thought of in your planning.
Suppose you and your spouse have planned to pay off a mortgage, send your children to college and build adequate retirement savings. You are 45 years old, earn $250,000 per year, and currently have $1,500,000 of life insurance coverage. You plan to work 20 more years and retire at age 65. If you multiply your current earnings by 20, you get a very rough estimate of your future earnings $5,000,000. Is this how much life insurance you need?
The simple answer is, no. There are many factors to consider when estimating the financial needs of your family if you were to die unexpectedly today. Along with the loss of income, death of a breadwinner can also eliminate routine personal expenses that add up over years. Federal and state income taxes will no longer be due, so they too must be subtracted. Additionally, you’ll have to factor in any increases in future earnings.
Some other items to consider when determining the amount of life insurance include inflation, as costs traditionally increase over time. Large unexpected medical expenses may be incurred. In addition, future medical insurance for the family may increase. Funeral costs and estate taxes should also be a part of the calculation.
Now what about life insurance for the spouse? If the spouse is earning an income, then income replacement is important. It is also important to review the life insurance needs for a stay-at-home spouse. We don’t want to forget the cost of services performed such as child care, elder care, housekeeping, carpooling, meal preparation, teacher, psychologist, etc. There are studies that quantify how much it would cost to replace the functions performed by stay-at-home spouses and it is estimated to exceed $100,000 per year. This translates to the importance of a review of the life insurance needs for both spouses.
Many insurance policies also have additional benefits, or riders, that should be considered. For example, a waiver of premium rider states that you don’t have to pay premiums during your working years if you become totally disabled and cannot work. Another is the long-term care rider which allows you to accelerate the payout from a life insurance policy to pay for long-term care benefits once qualifying requirements are met. Although adding benefits increases the cost of coverage, these and other riders could be very beneficial in the right circumstances.
We at Frisch Financial Group are here to help you objectively determine your family’s financial needs and to make a plan to provide for them now and in the future. While we do not sell insurance, we can help you determine both the appropriate level of coverage and the type of insurance that best serves your specific needs. We can also review your existing policies. We are located in New York City, Long Island, Westchester and Tampa, Florida where we serve the surrounding areas.