How much life insurance should an individual own?
Rough "rules of thumb" indicate an amount of life insurance equal to 6 to 8 times annual earnings is appropriate for most people who are supporting a family. However, an individual's personal circumstances may suggest more or less insurance be obtained - single people need less insurance than those with dependents. Some important factors to consider include
income sources (and amounts) other than salary/earnings, whether or not you are married and, if so, what is your spouse's salary, the number of individuals who are financially dependent on you, should life insurance be used to reduce or eliminate your mortgage, the amount of benefits payable from Social Security, benefit amounts payable from an employer-sponsored group life insurance plan, and what can you afford?
If your gross annual salary is $40,000 you should probably have coverage of approximately $240,000 (6 X annual salary). If you have group life coverage through your employer (typically at 1 X annual earnings) you may wish to obtain an additional $200,000 to ensure that your mortgage repayment, college education fund, and general family needs are taken care of in your absence. Take a look at our Life Insurance Calculator to get an idea of how much insurance you may need to protect your family. Top What about purchasing life insurance on a spouse and on children? In certain circumstances, it may be advisable to purchase life insurance on children. However, such purchases should only be made after purchasing appropriate amounts of life insurance on the family's income earners. It is most important that the income earned by the primary "breadwinner" be fully protected (to the level indicated above, if possible). In a dual-earning household, it is important to protect the income earning capacity of both spouses. Life insurance on a non-wage earning spouse is recommended for the purpose of paying for household services lost at this individual's death. Top Choosing Life Insurance Beneficiaries Life insurance policies require that you name a beneficiary. Many people do not give the process much thought, simply naming a spouse and/or children and then putting the whole thing out of mind. But choosing your beneficiary and keeping that choice up to date is very important for the policy to deliver the benefits to the right people. Here are some things to consider: One of the advantages of life insurance is that proceeds payable to a named beneficiary pass outside of probate (the legal process of executing your will). Naming your "estate" as beneficiary subjects the money to the probate process, which can be both lengthy and costly. Life insurance proceeds are paid immediately to named beneficiaries. Consequently the wording of beneficiary designations is very important. An improperly named beneficiary can have drastic effects on how the insurance proceeds are distributed. You would not want to name your spouse simply by designating "husband" or "wife;" because this could result in an ex-spouse receiving proceeds intended for others. Accordingly, it is important to review insurance beneficiary designations in the event of divorce. Naming specific children may mean that later-born children will be left out unless the beneficiary designation is updated at the birth of each new child. Saying "Children of the insured, John Smith" could mean that your wife's child from a previous marriage, whom you meant to include, is in fact excluded. Saying "Children born of the marriage of John and Susan Smith" may mean excluding adopted children.
It is also advisable to name a "contingent" or secondary beneficiary in the event a primary beneficiary has predeceased you. Many people choose the wording for their beneficiary designations in conjunction with the attorney who has drafted their wills and/or trusts. Don't have a will, click here for more information (the website will launch in a new window). It is not generally advisable to name minor children as beneficiaries, but rather to name a guardian for minor children and a trustee for insurance proceeds and other assets to be managed until they reach the age of majority. Likewise, if a child named as beneficiary under your policy predeceases you and you would want the proceeds to go to their child(ren), you must specifically state such. You must also decide how such grandchildren will share in the proceeds with your other children, whether everything will be divided equally or whether the grandchildren will split what would have been their parent's share.
It is very important to anticipate as many situations as possible. It is also vitally important to review your beneficiary designations on a regular basis. Changing beneficiary designations is easy (there is an on-line form in our forms section that you can download and complete to make a change), but you have to remember to do it. Unless you make an irrevocable designation (one that cannot be changed), as might be the case in a divorce settlement, you can change beneficiary designations as often as you like. In conclusion, when making your beneficiary designation - be specific - my wife Karen Howard, or my brother David Schmidt, or equally to my children Sarah, George and Tom, or Grace Baptist Church (at 7th & Main in the town of Clearwater)
you can name any person, church or charity but you must include some information that will help the insurance company pay the proceeds to the correct person or organization: address, phone number and in the instance of an organization you should include the name of someone to contact. Top What is the tax treatment of life insurance benefits? In most situations, individually purchased life insurance proceeds are not subject to income tax. Group life insurance purchased on your behalf by an employer is taxable to the extent that it exceeds $50,000. Depending on an individual's personal circumstances inheritance taxes and gift taxes may apply to life insurance benefits. An accelerated death benefit received under provisions of group life insurance coverage may be taxable to the recipient. You should contact your tax advisor regarding questions concerning the possible income, estate and gift tax consequences surrounding any life insurance that you currently own or are contemplating purchasing. Top |
