Tag: Life Insurance

Do You Have Enough Life Insurance?

August 27, 2024
Insurance

Your life insurance needs change as your life changes. When you are young, you may not have a need for life insurance. However, as you take on more responsibility and your family grows, your insurance need increases but then decrease after your children are grown.

You should periodically review your life insurance coverage to ensure that it adequately reflects your life situation. Here are several methods to consider in determining your life insurance needs.

Income rule

The most basic rule of thumb is the income rule, which states that your insurance need would be equal to six or eight times your gross annual income. For example, a person earning a gross annual income of $60,000 should have between $360,000 (6 x $60,000) and $480,000 (8 x $60,000) in life insurance coverage.

Income plus expenses

This rule considers your insurance need to be equal to five times your gross annual income plus the total of any mortgage, personal debt, final expenses, and special funding needs (e.g., college). For example, assume that your gross annual income is $60,000 and your total expenses are $160,000. Your insurance need would be equal to $460,000 ($60,000 x 5 + $160,000).

Income replacement calculation

The income replacement calculation is based on the theory that the family income earners should buy enough life insurance to replace the loss of income due to an untimely death. Under this approach, the amount you should consider purchasing is based on the value of the income that you can expect to earn during your lifetime, taking into account such factors as inflation and anticipated salary increases, as well as the interest that the lump-sum life insurance proceeds will generate.

Family needs

With the family needs approach, you would purchase enough life insurance to allow your family to meet its various expenses in the event of your death. Under the family needs approach, you divide your family’s needs into three main categories:

Immediate needs at death (cash needed for funeral and other expenses)
Ongoing needs (income needed to maintain your family’s lifestyle)
Special funding needs (college funding, bequests to charity and children, etc.)

Once you determine the total amount of your family’s needs, you should consider purchasing enough life insurance to cover that amount, taking into consideration the interest that the proceeds of it could earn over time.

Estate preservation and liquidity needs

This approach attempts to calculate the amount of life insurance needed upon your death to settle your estate. This method takes into consideration the amount of life insurance required to maintain the current value of your estate for your family, while potentially providing the cash needed to cover death expenses and taxes. Using this method, you should consider purchasing enough life insurance to cover potential estate taxes, along with funeral, accounting, and legal expenses associated with the administration of your estate. The life insurance may allow you to preserve the value of your estate at the level prior to your death and to help prevent an unwanted sale of assets to pay estate taxes and related expenses.

As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications. The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased.

To learn more about CapSouth and the services we provide, visit our website at https://capsouthwm.com/what-we-do/or click here to schedule a Discovery Call.

CapSouth Partners, Inc, dba CapSouth Wealth Management, is an independent registered Investment Advisory firm. This material is from an unaffiliated, third-party and is used by permission. Any opinions expressed in the material are those of the author and/or contributors to the material; they are not necessarily the opinions of CapSouth. Information provided by sources deemed to be reliable. CapSouth does not guarantee the accuracy or completeness of the information. CapSouth does not offer tax, accounting or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences. This information has been prepared solely for informational purposes, is general in nature and is not intended as specific advice. Any performance data quoted represents past performance; past performance is no guarantee of future results.

Insurance Considerations When You Have Children

October 31, 2019
Insurance

A growing family, by definition, means growing financial obligations – both in the present and in the future. Raising children can increase your insurance needs and heightens the urgency for being properly prepared.

Auto. When a child becomes a new driver, one option is to add the teenager to the parents’ insurance policy. You may want to discuss with your auto insurer ways to reduce the additional premium that accompanies a new driver.[i]

Home. You should periodically review your homeowner’s insurance policy for three primary reasons.

A growing family generally accumulates increasing amounts of personal belongings. Think of each child’s toys, clothes, electronic equipment, etc. Moreover, household income tends to rise during this time, which means that jewelry, art, and other valuables may be among your growing personal assets.

The second reason is that the costs of rebuilding – and debris removal – may have risen over time, necessitating an increase in insurance coverage.

Lastly, with growing wealth, you may want to raise liability coverage, or if you do not have an umbrella policy, consider adding it now. Umbrella insurance is designed to help protect against the financial risk of personal liability.

Health. With your first child, be sure to change your health care coverage to a family plan. If you and your spouse have retained separate plans, you may want to evaluate which plan has a better cost-benefit profile. Think about whether now is the appropriate time to consolidate coverage into one plan.

Disability. If your family is likely to suffer economically because of the loss of one spouse’s income, then disability insurance serves an important role in replacing income that may allow you to meet living expenses without depleting savings.

If you already have disability insurance, consider increasing the income replacement benefit since your income and standard of living may now be higher than when you bought the policy.

Life. With children, the amount of future financial obligations increases. The cost of raising children and funding their college education can be expensive. Should one of the spouses die, the loss of income might severely limit the future quality of life for your surviving children and spouse. Not only does death eliminate the future income of one spouse permanently, but the future earning power of the surviving spouse might be diminished as single parenthood may necessitate fewer working hours and turning down promotions.

The amount of life insurance coverage needed to fund this potential financial loss is predicated on, among other factors, lifestyle, debts, ages and number of children, and anticipated future college expenses.

Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.

Some couples decide to have one parent stay at home to care for the children full time. The economic value of the stay-at-home parent is frequently overlooked. Should the stay-at-home parent die, the surviving parent would likely need to pay for a range of household and childcare services, and potentially, suffer the loss of future income due to the demands of single parenthood.

Extended Care. The earlier you consider extended care choices, the better. However, the financial demands of more immediate priorities, like saving for your children’s college education or your retirement, will take precedence if resources are limited.

To discuss your family’s insurance needs with a CapSouth advisor, contact our office at 800.929.1001 or visit our website at https://capsouthwm.com/contact/

Investment advisory services are offered through CapSouth Partners, Inc., dba CapSouth Wealth Management, an independent registered Investment Advisory firm. Information provided by sources deemed to be reliable. CapSouth does not guarantee the accuracy or completeness of the information. This material has been prepared for planning purposes only and is not intended as specific tax or legal advice. Tax and legal laws are often complex and frequently change. Please consult your tax or legal advisor to discuss your specific situation before making any decisions that may have tax or legal consequences.

This article contains external links to third party content (content hosted on sites unaffiliated with CapSouth Partners). The policies and procedures governing these third-party sites may differ from those effective on the CapSouth company website, as outlined in these Disclaimers. As such, CapSouth makes no representations whatsoever regarding any third-party content/sites that may be accessible directly or indirectly from the CapSouth website. Linking to these third-party sites in no way implies an endorsement or affiliation of any kind between CapSouth and any third party, including legal authorization to use any trademark, trade name, logo, or copyrighted materials belonging to either entity.

[i] https://cars.usnews.com/cars-trucks/car-insurance/average-cost-of-car-insurance

Life Insurance as an Asset Class

July 29, 2019
Insurance

By J. Scott Fain

July 2019

Viewing life insurance as an asset class provides an additional benefit to consider when evaluating the purchase or continuation of an insurance policy.

What do I mean by asset class? Traditional asset classes might include equities, fixed-income securities, cash equivalents, and real estate. These categories organize various financial tools into groups that have similar characteristics, primarily in terms of risk. Equities are generally considered to provide the greatest return over time, but also can carry the greatest amount of risk and volatility. Advisors and portfolio managers typically strive to diversify clients’ portfolios to manage the amount of risk taken while still achieving acceptable rates of return over time.

Through the types of investments referenced above, what circumstances are needed for you to make money? (Hint: We’ve mentioned two big factors twice already…) That’s right, you need returns and time. We all hope for long, prosperous lives, but what if death occurs prematurely? Now we have removed the element of time. Though our money may have been invested well, those investments may not have had time to perform.

So what options do we have available to provide a greater return in the short-run? You guessed it: Life Insurance. What if we had sufficient liquidity for our lifetime needs, and took one portion of our assets and invested in a life insurance policy? Let’s look at an example:

Charlie is a 42 year-old male in good health. Charlie is married to Sara, and they have two children, Larry and Mary. Charlie and Sara currently have $750,000 in assets, and Charlie has an annual income of $85,000. We will utilize sample average rates of return for the typical asset classes, and guaranteed internal rates of return for the life insurance death benefit based on a sample Nationwide illustration.

Charlie plans to contribute an additional $7,500 per year to his investments. Using a $1,904 annual premium for a $250,000 permanent life insurance policy guaranteed to Age 121, let’s look at potential outcomes:

Under this simplified example, if all typical investments average the assumed rates of return, the portfolio diversified with insurance is more favorable if death occurs any year through age 76. Following that age, investing the full $7,500 annually in equities would’ve generated a higher asset value. Note: These figures do not provide an adjustment for the tax savings. The $250,000 death benefit generated by the life insurance policy pays to Charlie’s heirs income tax free under current law. It is also important to note that the return generated by the life insurance policy is guaranteed, subject to the claims paying ability of the insurance company.

Might it be time for you to consider insurance as an asset class?

Contact CapSouth at 800.929.1001 for more information on this concept and how it might apply to your particular situation. Also visit our website at www.capsouthwm.com

CapSouth Partners, Inc., dba CapSouth Wealth Management, is an independent registered Investment Advisory firm. CapSouth does not offer tax, accounting or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences.