"Financial Concerns for Retirement - Your Financial Playbook"
A book by Kelly C. Ruggles
Chapter 3- Insurance & Asset Protection
What about your most important asset: your life? What will happen if you die before your spouse? Will your estate be subject to estate tax? A good insurance policy can provide coverage that will provide for your spouse and pay your estate taxes. As a general rule the older we get the less we need insurance. Indeed, in my practice I often help couples and individuals reduce their insurance coverage; however, one must be very careful in determining and maintaining the proper amount of insurance.
How much life insurance do you need?
You can estimate how much you need by answering the following questions.
- What economic needs will your family face in the short term if you pass away?
- What will your family need in the long term if you pass away?
- What are the total resources available to your family at this time?
- How much insurance coverage would you need to cover any shortfall?
Short Term Needs
To determine your short-term needs, consider your financial obligations and/or expenses that will need to be met within six months of death, such as:
- Loan balances
- Outstanding credit balances
- Mortgages and equity loans
Consider any death-related expenses, which must be paid in the short term, such as:
- Funeral expenses
- Final medical costs
- Estate settlement costs
- Estate taxes
- Charitable bequests
Your surviving spouse and/or dependents should also have an emergency fund with enough funds to get them through at least six months.
Long Term Needs
Your surviving spouse will also require income to cover long-term needs and enough money to meet other financial goals. These long-term needs may include:
- Future income to cover cost of living
- Elderly care expenses, or support for a disabled dependent
- Mortgages and equity loans
Calculating Your Total Available Resources
Once you have determined your survivors' monetary needs in the event of your death, you may have already started to set aside funds to cover some of these costs. Consider the following areas:
- Estimated earned income of your survivor(s)
- Retirement Social Security benefit (begins approximately when your spouse turns 65)
- Survivor benefits from your pension plan
Funds To Cover A Shortfall
You may find that you have a shortfall when you compare your total needs to your resources.
Life insurance can cover this shortfall. By paying a premium to an insurance company, they in turn promise to pay your beneficiaries a specified death benefit in the event of your death.
A financial need that arises from your death can be eliminated by this financial resource, which is created upon your death.
Factors To Consider When Selecting Life Insurance
In an ideal world, everyone would have enough life insurance to enable their survivors to live in a manner to match their current lifestyle, but unfortunately, that is not always affordable.
Fortunately, life insurance comes in many shapes and sizes. You can easily find the type and amount of life insurance that best meets your needs to further ensure that you have successfully provided for your family's monetary needs even if you are not here to do the providing.
Types of Life Insurance
Life insurance comes in many different forms and each of them has distinctive pros and cons. A good planner will be able to guide you to the one most suited to your needs.
Term life insurance
Term life insurance is only in effect so long as you pay the premiums. Thus, it is designed for temporary situations. For example, parents may buy term life insurance to provide for children while they are minors. Companies often take out term policies on key executives only while they are employed at that company, as their death can harm the business. Business partners may also take out term policies on each other.
Term life insurance:
- Pays a specific lump sum to whomever you designate.
- Death benefit remains constant.
Term life insurance does NOT:
- Have a cash value that you can borrow against.
Insurance provided as an employee benefit is almost always term life insurance. Term life insurance is least expensive when you are young and the premiums rise as you age.
Permanent life insurance
Permanent life insurance, also known as "whole" life insurance, is more of an investment. The cash value of the policy depends upon what has been paid into it. Even if you stop paying premiums you will still have a policy that you can keep or sell. This is a better choice for situations where there is a permanent need such as someone who wishes to provide for a spouse.
Permanent life insurance:
- Pays a death benefit to the beneficiary you name and offers you a low risk cash value account and tax-deferred cash accumulation.
- Provides a fixed premium, which can't increase during your lifetime as long as you continue to pay the planned amount.
- Allows the insurance company to exclusively manage the cash value account in your policy.
- Provides you with the option to receive dividends from your policy or apply them to reduce payments.
- Offers you the right to withdraw cash value from the policy during your lifetime.
Permanent life insurance does NOT:
- Offer you account flexibility to invest in separate accounts such as money market, stock, and bond funds.
- Allow you flexibility to split your money among different accounts or to move your money between accounts.
- Offer premium flexibility.
- Offer face amount flexibility
Survivorship Life Policy
If your estate will be subject to estate taxes, one of the most common and economical ways to cover these costs is to own a "survivorship" policy, which will pay your tax due and any other debt at death.
Why insurance policies "blow up"
Unfortunately, insurance policies aren't always ironclad; sometimes they "collapse". Some insurance policies are tied to interest rates. These policies depend upon the cash value of the policy and whether or not it has earned enough interest to pay the premiums on the policy. Thus, there are two columns that show you payout amounts-the "guaranteed" column, and the "projected" column.
The main point is if interest rates stay the same or rise, you're in good shape because the projected earnings will materialize. If interest rates fall, the "projected" column is no longer valid and you must rely on the "guaranteed" column.
How can you tell what's what? Ask to see the policy ledger and review it carefully. Ask your advisor to explain these projections in detail.
Next Chapter: Medigap
©2007, Kelly C. Ruggles
Kelly C. Ruggles, President of American Reliance Group, Inc., is a registered investment advisor. Mr. Ruggles is the author of "The Financial Playbook" for Retirement.
Mr Ruggles does not intend to provide personalized investment advice through this publication and does not represent that the strategies or services discussed are suitable for any investor. Investors should consult with their financial advisors prior to making any investment decisions.