Walsh College

How Much Insurance Do You Really Need?

When estates as low as $600,000 were subject to tax (as recently as 1997), having life insurance was often an important tool in estate planning, to prevent surviving family members from a financial setback.  Even though estates up to nearly $11.2 million are now sheltered from federal tax, life insurance remains an important part of an estate plan for many people.  Millions of people own life insurance policies through work or policies bought when they were married or had their first child.

How much life insurance is enough?  Financial planners often use a needs approach when answering that question.  Among the factors to consider:

Expenses at death — Make sure your estate has enough liquid assets to cover funeral expenses, the cost of any last illness and probate fees and expenses.

Short-term income needs — The mortgage, utility bills and day-to-day living expenses will continue unabated.  There should be sufficient insurance to cover these expenses without a drastic change in the family’s living standards.

Long-term income needs — The impact of lost income will depend upon whether the insured is the sole wage-earner, whether there are minor children to raise and educate and other sources of income such as Social Security.

Special needs — Coverage to pay off a mortgage, care for family members with special needs or provide a fund for educating minor children also should be considered.

As family circumstances change, your need for life insurance will probably also change.  If you find you have a policy that is no longer needed for family security, consider a charitable gift of the policy, which entitles you to an income tax charitable deduction.


Talk about the Estate Planning Facts of Life

Every parent who has had “that talk” with a child knows how awkward the situation can be.  There’s another “talk” parents and children should have that may be equally as difficult.  We’re referring to the discussion about the parents’ estates.

Adult children often hesitate to inquire about the parents’ wills or life insurance coverage for fear of appearing greedy or nosy.  Parents sometimes fear they will lose control of their assets by divulging too much.  But failing to have this talk may be an injustice to both the parent and child.

In many cases, the child will be handling, or at least assisting with, the arrangements following the death of a parent.  Knowing where the parent has bank accounts or where the will is kept can make the job much easier.  Knowing what resources are available is also helpful if the child must assume responsibility for the parent’s finances.

What else should parents and children discuss?

  • Are there personal items — jewelry, china, a handmade quilt — that the parents want to pass down to a particular loved one?

  • What funeral arrangements would the parents like?  Have they already purchased cemetery plots?  Are there any special requests for the services?

  • Where are insurance policies, deeds and other important papers kept?  Do the parents have living trusts and, if so, where are they located?

  • Would parents want contributions to favorite charities in lieu of flowers?  How should these gifts be earmarked?


Tying the Knot, Senior Style

Call the caterer.  Order the flowers.  Reserve the hall.  Send a change of address to AARP.  It’s not uncommon for people of retirement age to remarry after the death of a spouse — or even to marry for the first time.  Here are a few items to add to the wedding checklist:

Insurance — Review your health insurance options.  If one or both spouses are still employed, will both have separate coverage at work, or would it make more sense to drop one policy and elect dependent coverage on the other’s company policy?  Compare premiums and coverage available.  For an older couple, life insurance can help provide estate liquidity.  Determine whether the new spouse will be the beneficiary or whether children from a previous marriage are to receive the proceeds.

Whose money is it? — Some couples like to put all their income into one pot and pay all expenses jointly.  Others like to keep income separate.  Many couples fall somewhere in between.  A joint account may be handy to pay expenses that can’t be neatly divided — utilities, groceries, etc.  But it’s a good idea for each spouse to establish credit in his or her own name.  Decide who is in charge of paying bills and balancing the checkbook.

Home sweet home — If either or both spouses already own a home, there may be tax considerations on a sale and repurchase.  For example, consider a bride who owns a $600,000 house which she originally purchased for $250,000.  She might owe capital gains tax on as much as $350,000 if she sells prior to marriage.  The couple might want to live in the home for at least two years, enabling them to shelter up to $500,000 of gain and avoiding capital gains tax entirely.  However, if the husband also owns a home, he may have to consider how any capital gains in his house will be treated.

Will you... — All couples should prepare wills.  Consider what happens if they are in an accident together, with the wife dying immediately and the husband the next day.  Depending on state law, the wife’s entire estate might pass to the husband.  At the husband’s death, his estate could pass to his family, leaving the wife’s family with nothing.  A will or living trust is a must for couples with significant assets — especially those who have children from a previous marriage.  Special trusts can be created to provide the surviving spouse with income for life, with assets then passing to the children.  A prenuptial agreement could also address many of these issues, but should be done in conjunction with wills for both parties.


How Will You Spend Your Retirement Savings?

In building a retirement nest egg, it’s important to decide whether you plan to live solely off the earnings of your savings or whether you plan to dip into principal during your retirement years.  Many retirees take a middle ground.  They live to the extent possible off earnings from retirement savings but dip into principal if the rate of return on savings drops or if inflation erodes the buying power of their income.  Ask yourself a few questions before deciding how you want to spend your retirement:

  • Do you want to preserve assets for family members?  If you dip into principal to support your retirement, there will be less to pass to children or grandchildren.

  • Can you make the switch from saving for retirement to spending during retirement?  Some life-long savers may find it difficult to make the abrupt change and scrimp needlessly.

  • What other sources of income do you have?  If you underestimate your life expectancy, your retirement savings may be depleted early.  Determine how much of the income you need will come from Social Security, annuities and retirement plans that pay income for life, no matter how long that might be.  Consider using some assets to establish a charitable gift annuity that will make payments to you for life, no matter how long that is, while also supporting organizations that are important in your life.

  • The table below shows how long $100,000 of retirement savings will last at various interest rates and rates of monthly withdrawals.

Monthly
Withdrawal

3%

4%

5%

6%

7%

8%

9%

10%

$400

32

43

*

*

*

*

*

*

500

23

27

34

62

*

*

*

*

600

18

20

23

29

*

*

*

*

700

14

16

18

20

25

*

*

*

800

12

13

14

16

18

22

30

*

900

10

11

12

13

14

16

19

26

1,000

9

10

10

11

12

13

15

17

1,200

7

8

8

9

9

10

10

11

1,400

6

6

7

7

7

8

9

9

1,600

5

5

6

6

6

6

7

7

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