It may be hard to believe, but it’s true: 30% of all American households don’t have life insurance. This calculates to about 37,000,000 American families that are unprotected when a death affects the family’s financial needs during an emotional crisis.
This is compounded by the admission that 62% of uninsured families expect to suffer financial vulnerability should a primary wage earner unexpectedly die. These unhappy statistics are a result of a 2016 study by the Life Insurance and Market Research Association (LIMRA).
Life insurance can facilitate this difficult time by providing funds to cover immediate or short-term cash requirements when a wage earner in your family dies. Your family may own assets that are not easily liquidated, such as a closely-held business, or property in the form of land, a vacation home, or your family home.
When a forced sale of estate property is required, economic loss is likely. This is why having cash available, such as in the form of life insurance, can preserve your family’s assets until a more circumspect financial review is conducted.
It’s important to estimate the amount of cash your family will need so your calculations can acquire sufficient life insurance coverage to meet those needs, and perhaps others. This is an exercise you should conduct at least once every three years and also whenever your financial situation and asset ownership changes. Adequate insurance coverage will make you and your family feel comfortable when the inevitable happens.
Here are a number of potential needs your family may face when the person who supports your family expires:
1. Ongoing Living Expenses. Sufficient funds should be available to maintain your family’s current standard of living for at least 6 – 12 months. Your family may also have special needs such as providing funds for the care of children if they are underage, or for family members who may need special medical care.
2. Administration Expenses. There will be probate expenses which may include legal costs as well as expenses for the executor and other business professionals. Also, the estate’s property may need to be maintained (leases and other obligations, for example) until probate is concluded and the property distributed.
3. Funeral Costs. These may be prepaid already, but if not, these expenses add up. There may also be final medical expenses not covered by medical insurance.
4. Debt. An accounting of debts may reveal the need to have sufficient cash to pay unpaid bills, mortgages, installment debt, and any court mandated payments. If your family decides not to pay these debts immediately, the cost of carrying these debts for a period of months should be estimated and included in your life insurance calculations.
5. Personal Income Tax. Federal and state income taxes will need payment for the year of death and any unsettled years. Include the payment of penalties or interest if applicable.
6. Estate, Inheritance, and Generation-Skipping Transfer (GST) Taxes. In addition to these, if your state also has death taxes, those should be included in your calculations.
7. Expenses and Taxes Related to the Family Business. Your family business may need to meet payroll or other operating expenses. Additionally, there may be a need for cash to fund a buy/sell agreement or to exercise stock options.
8. Educational Funds. Consider the value of making additional life insurance funds available to educate children or grandchildren, or to assist a surviving spouse who needs training to return to the job market.
This list of eight items is a starting point for the review and assessment of your family’s needs.
Obviously, there is no better time than now to meet with your financial advisor and discuss either purchasing a life insurance policy to ensure your family’s security, or to review your policy and confirm that it sufficiently provides for your family when you are gone. Purchasing life insurance is a relatively easy task with tremendous benefits for those you love.
We hope this article about protecting your family with life insurance provided useful information and guidance on what to consider when analyzing your family’s future needs. Synergy Financial Management welcomes your inquiries and is available to discuss your insurance needs as well as your portfolio’s ability to preserve your wealth from undue risk while also meeting your retirement lifestyle’s needs. Please give us a call for a free introductory discussion about how we can reduce your risk while improving your portfolio’s performance. Thank you!
Joseph M. Maas, CFA, CVA, ABAR, CM&AA, CFP®, ChFC, CLU®, MSFS, CCIM
Synergy Financial Management, LLC
13231 SE 36th Street, Suite 215
Bellevue, WA 98006
This article is for general educational purposes only. Nothing should be construed as individual tax advice. Please consult a tax advisor to see if this information is right for your situation.