Magda Olivas
Magda Olivas
Life Insurance: Where do I Start?

Life Insurance: Where do I Start?

No one wants to think about their death, however proper life insurance planning will ensure your loved ones are taken care of should something happen to you. Life insurance will help provide for any dependents you leave behind. Sounds great right, but how much life insurance do you need? What needs to be covered to ensure your loved ones are looked after? Here we will explore things to consider when purchasing life insurance to make sure you are covering all our bases.

First, who needs life insurance? If you support or help support anyone financially, spouse, children, ailing family members, etc., you need life insurance. Second, how much insurance do you need? You want to make sure your dependents have enough to cover all expenses they will have. There are several things you need to consider when figuring this amount.

Do you have any debts such as a car loan, mortgages, credit cards, student loans, etc.? All your debts will need to be paid upon death, meaning your dependents will need enough money to cover all these debts. The minimum amount of life insurance you need will need to cover the principal and interest on all debts. Now, you can stop here, purchase enough life insurance to cover your debts, and be done. However, you also want to consider any living expenses your dependents will have after you pass away.

Are you the sole breadwinner in your household? Does your partner work? If so, will your partner be able to cover all expenses (bills, childcare, child education, any dependents with special needs, etc.) on their own? Do you stay at home while your partner works? If so, does your partner make enough to cover all the things you do while at home (childcare, house cleaner, gardener, personal shopper, etc.)? If you choose to include living expenses in your life insurance policy, how much do you need to include? A policy should include your annual income, plus some extra to account for inflation. If you take care of the house while your partner works, your policy should include enough to cover the cost of any hired-out positions should you pass away.

All right, you’ve calculated all your debt, added up all your dependents living expenses, and you have arrived at a number you need to cover one year of life for your dependents. Now what about next year, and the year after that? What you need to do now is decide how long your dependents will need to receive the money to get by. Looking at the age of your dependents will help you determine how many years you need to multiply your yearly amount by.

What about taxes? Good news! Tax law enables asset protection because all proceeds of life insurance are tax free to the beneficiary. This is especially desirable for higher net worth individuals who may want to minimize estate taxes. The 2020 limit for policy owners with estates is $11.58 million. This means that the estate’s beneficiary will not have to pay taxes for the first $11.58 million or $23.16 million for married couples.

You may wonder who you should insure as there may be many people who are important in your life. You may only insure those people whose death would financially affect their loved ones. Educating yourself is crucial when making the right choice. ADFK is here to consult with you on these and other critical decisions while planning for your future. You can make an appointment today.

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