Life insurance has two basic purposes. The first purpose is to replace income that is lost from the person who passes away. The second one is designed to be a way to enhance the estate left behind for any beneficiaries.
In regards to the first purpose, managing the risk of a premature death of either spouse is critical both while you’re working and when you are retired. In order to understand how much, if any, life insurance is needed you must complete a comprehensive financial plan. This includes an overall look at your investments, social security benefits, tax plan, estate plan, and insurance. Once the financial plan is created, it’s important to then stress test the plan for a premature death to find out how much the plan could suffer. If the plan for the surviving spouse and family is negatively impacted, then you can put assumptions into the plan for different amounts of life insurance.
Once you understand clearly what your family’s needs are then the question of how much insurance you need and what type of insurance should be purchased will become clearer. Be aware, life insurance is sometimes sold using scare tactics. If you’re not doing comprehensive financial planning, you may fall prey to the life insurance salesperson. Make sure to take the time to speak with a trusted financial advisor so that together you can decide the amount of insurance that is necessary to transfer the risk of a premature death.
On the subject of estate enhancement or inheritance enhancement, life insurance becomes a unique planning opportunity for people who have saved more than they will ever spend during their retirement years. This becomes a very simple math problem. If you have additional dollars that you will not spend in retirement, take a look at what those dollars have the potential to earn and consider using those earnings to purchase life insurance to enhance your estate. Many times if you look at the internal rate of return on the death benefit that will go to your beneficiaries versus the premiums paid into the policy, it can equate to 7 to 10% of annualized rates of return (tax-free) to your beneficiaries. This type of policy is not for everyone but for those who would like to leave behind more than what they accumulated themselves, this can be a very effective tool.
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Investment advisory services offered through Barber Financial Group, Inc., an SEC Registered Investment Adviser.
The views expressed represent the opinion of Barber Financial Group an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Barber Financial Group does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.