There are three primary reasons to own life insurance. Life insurance death benefits can replace the breadwinner’s income in the event of premature death, pay future estate taxes for pennies on the dollar, or employ particular planning strategies.
Using life insurance to replace the primary breadwinner’s income during their working years is a practical necessity, especially when you have children. Unfortunately, there are still many people who fail to protect their loved ones in this way. If you don’t carry enough insurance to replace your income, should you die, you could burden your family. This is even more important for single-parent households.
A simple rule of thumb to determine if you have enough insurance is to divide your annual salary by .05. For example, earning $50,000 per year, you should own approximately $1,000,000 in life insurance.
Once you retire, you may no longer need this insurance. If you’ve accumulated enough assets to provide comfortably for your lifetime, then life insurance is no longer needed for income replacement purposes. However, don’t cancel that policy yet because you may need it for other reasons.
For 2007, an individual can pass $2 million ($4 million for couples) to their heirs free of the federal estate tax. If you’ve accumulated more than this amount of assets, you may need life insurance to pay future estate taxes. Unfortunately, few married couples have the proper plans and forfeited one exemption, reducing that amount to $2 million.
Life insurance is an excellent way to pay estate taxes without being forced to liquidate assets. This is particularly true when a large percentage of an estate is tied up in illiquid assets, such as a business interest or real estate. In those cases, illiquid assets would have to be sold swiftly at probably less than their actual market value to pay the tax bill.
With the proper use of this insurance, you can avoid these situations entirely and plan in such a way that you pay your taxes for pennies on the dollar. If your estate is smaller, you may not need life insurance to help cover future estate taxes.
The third use of life insurance is for particular planning strategies. You can use unique methods to increase the financial support you can provide to your favorite charitable causes or offer a financial safety net for your loved ones for generations.
Even those of modest means can provide millions of dollars to worthy causes while passing on a legacy of giving to future generations. Very few are aware of these strategies.
You may no longer need life insurance if you don’t fit one of these situations. Don’t take this decision lightly, though, significantly if your health has diminished. Depending on your age and health, you may realize more by selling your policy instead of canceling it. Always consult a qualified, unbiased professional before withdrawing your policies to explore your options.