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Life Insurance: How Much Is Enough?

You may already know the importance of having enough life insurance coverage to handle financial matters that could affect your family in the event of your death. However, determining the appropriate amount of coverage can be complicated. Rather than using an arbitrary formula, such as having enough coverage to equal five to seven times your annual salary, you may want to conduct a needs analysis.

A needs analysis incorporates an evaluation of your family’s most important financial obligations and goals. It can help you plan to address mortgage debt, college expenses, and funds for your family’s future, as well as liquidity for meeting potential estate tax liabilities with life insurance coverage.

Mortgage Debt
Consider whether your life insurance proceeds will be sufficient to help pay your mortgage loan balance. If you are carrying a large mortgage, you may need to increase your life insurance coverage. If applicable, consider a second home mortgage into the formula.

College Expenses
Many people want life insurance proceeds to help cover their children’s undergraduate college and, possibly, graduate school expenses. The amount needed can be roughly calculated by matching the ages of your children with projected college costs adjusted for inflation. Because it may be difficult to project costs that far into the future, it is important to revise this calculation periodically, as your children get closer to college age. When estimating long-term savings goals, it may also be a good idea to be as conservative as possible.

Your Family’s Lifestyle
The amount you may need to help provide for your surviving spouse and dependents will vary according to your age, health, retirement plan benefits, Social Security benefits, and other assets, along with your spouse’s earning power. Many surviving spouses may already be employed or will find employment, but your spouse’s income alone may not be sufficient to cover your family’s current lifestyle. Providing a supplemental fund can help your family maintain its standard of living in the event of your death.

Estate Taxes
Life insurance has long been recognized as a method for establishing liquidity at death to pay estate taxes and maximize asset transfers to future generations. Be sure to consult your qualified tax and legal advisors to help ensure the desired results.

Existing Resources
If current assets and any other death benefits are sufficient to cover financial needs and obligations, you may not need additional life insurance for these purposes. However, if they are inadequate, the difference between your total assets and your total needs may be funded with life insurance.

You must consider many factors when completing a needs analysis. In addition to the areas already mentioned, ask yourself the following questions:

  • What are your estimated Social Security benefits at retirement?
  • How to “inflation-proof” your family income, so the real purchasing power of those dollars does not decrease?
  • What is the earning potential of your surviving spouse?
  • How often should your needs analysis be reviewed?
  • How can life insurance help provide resources for your retirement?
  • How do you structure your estate to reduce the impact of estate taxes?
  • Which of your assets are liquid and which would not be reduced by a forced sale?
  • Which of your assets would you want your family to retain for sentimental reasons or for future growth possibilities?

As insurance needs are evaluated, remember to assess your existing policies. Calculate the additional coverage needs based on your family’s financial obligations and any other resources, such as retirement benefits and personal savings. Planning now may help to protect your family’s financial future.

Copyright © 2019 Liberty Publishing, Inc. All rights reserved. Distributed by Financial Media Exchange.

The content of this material is provided for informational and educational purposes only and may not be applicable to all situations. Its contents should not be considered as an advice of any kind or as a suggestion to effect (or inhibit) any particular action. The information and general descriptions included are designed to help you understand some of the factors that you should generally consider when evaluating the relevance of any financial strategy. It does not include or take into account all the factors that may be relevant to your individual financial needs. By providing this information, we presume that you are able to evaluate this information an exercise your independent judgment. Banco Popular and/or its subsidiaries and affiliates are not engaged in the offering of tax, legal or accounting advice. If legal, tax or accounting assistance is required, the services of a competent professional should be sought. Brokerage products and services are provided by Popular Securities, LLC, a registered broker/dealer, member FINRA SIPC. Popular Securities, LLC is a subsidiary of Popular, Inc. and an affiliate of Banco Popular de Puerto Rico. Popular Inc. and Banco Popular de Puerto Rico are not registered broker/dealers. Investment products are not insured by the FDIC; are not deposits or obligations of the bank; are not guaranteed by the bank or its subsidiaries and/or affiliates; and are subject to investment risks, and they may lose value.  Insurance products are not insured by the FDIC or any other government agency; are not deposits or other obligations of, nor are they guaranteed by, Banco Popular de Puerto Rico or its subsidiaries and/or affiliates. Some insurance products may lose value. Insurance products and services are offered by Popular Risk Services an Insurance broker duly licensed by the Office of the Commissioner of Insurance of Puerto Rico. Popular Securities and Popular Risk Services are subsidiaries of Popular and affiliates of Banco Popular.