How Much Life Insurance Do I Need?

Speaker 1 (00:00):

How much life insurance do you need? Well, the answer of course depends. Depends on your age, your liabilities, your number of dependents, your marital status, and of course your goals. Not everyone has the same goals, not everyone is in the same situation, but we're gonna help you answer this question for you on this episode. So stay tuned.

Speaker 1 (00:27):

Welcome everyone to the Retirement Power Hour. My name is Joe Allaria. This is episode 33, and today we are answering the question, how much life insurance do I need? We're gonna walk you through that in just a second. But first, don't forget to go to retirement power hour podcast.com for all of our show's resources, you can click work with me, you can submit questions to us and we'll answer 'em here on the show. So let's jump into this for today. How much life insurance do you need? Primarily the purpose of life insurance is to provide a death benefit to a beneficiary or beneficiaries in the form of a lump sum when the insured person passes away. A life insurance policy is supposed to provide a death benefit to beneficiaries on the life of an insured person. Some common examples, let's think about if you're married, maybe you have children, your family is relying on your income.

Speaker 1 (01:16):

If you pass away, then they will need some sort of financial support if they were previously relying on your income, and that's where life insurance can come in and help with that. So what are some uses of a death benefit on a life insurance policy? You can use a death benefit to pay your mortgage off, to pay off high interest credit card debt, car loan debt, student loan debt. You might wanna set money aside for your children's future college education or their future weddings, or you might just wanna set money aside to provide that income replacement for your spouse or for your family for a certain amount of time in the future. So how do you figure out what is the right amount of life insurance for you? Well, we go through a step-by-step process and simply answer these questions. We have a worksheet that we go through that we use for our clients, but you can simply jot these things down as we go through it today and then tally up your total at the end and that will give you a pretty good idea of how much life insurance you need.

Speaker 1 (02:13):

So let's start with question number one on determining how much life insurance you need. And the first question is, do you have a mortgage? And if so, do you want your life insurance proceeds to pay off your mortgage in the event that you pass away? Now, some people might want their life insurance to pay off their mortgage, others may not. Even if you have a very low interest rate and you say to yourself, well, I don't wanna pay that off, it's a very low interest rate. You can still set some money aside or build that amount within your life insurance policy. And then if God forbid, something happens to you, the death benefit gets paid out, your spouse can choose at that time, do they want to pay the mortgage off or do they wanna invest the proceeds or that portion of the proceeds? Let's say you still owe $300,000 on your mortgage.

Speaker 1 (03:03):

They can decide, is it better to pay that mortgage off maybe my rate's 3% of my mortgage, or should I take the 300,000 and put it in a CD making 5%? So you can still build that in your death benefit amount even if you have a low interest rate on your mortgage. So question number two, do you have any other debt? Any high interest debt, credit card debt you might have some car loans, you might have student loans, any type of debt that is double digits. In terms of the interest rate, I typically recommend to get those things paid off as soon as possible. So that's what I would consider high interest, especially credit cards, they're probably gonna be 20% or more. So you wanna set some money aside to make sure that that type of high interest debt is paid off in the event that you were to pass away.

Speaker 1 (03:52):

If you don't have any great, if you don't have a mortgage, great. You can just put a zero next to both of those questions and we can move on. Question number three, do I want my life insurance to help pay for my children's future college education, their future weddings, or maybe even to assist with a down payment on their first home? If the answer is yes, then you might want to build in an allowance for these things in your death benefit amount. You, you want to add to your death benefit to make sure these things are covered. If you say to yourself, if I was living, do I plan on paying for these things? Do I plan on assisting my kids with these expenses? And again, whether you're here or not, if you want to assist your children with paying for their college, paying for their weddings, paying for their future homes, you'll wanna make sure you have some money set aside in life insurance.

Speaker 1 (04:42):

Unless you already have the money set aside in some other investment, then you're fine. But if you don't, like many younger parents, younger families, they don't have the money set aside. They plan on saving that money over time. So if you don't have the money set aside, build that into your life insurance amount. Question four, how much income do I want to provide for my spouse in the event that I pass away? If you're working, your spouse is relying on your income, you probably want to provide a portion of that income in the event that you were to pass away because your spouse most likely is relying on your income right now. If you aren't working or your spouse doesn't rely on your income, I suppose you could put a zero here, but even for a family, let's say let's, let's say the one spouse is staying at home taking care of the children, the other spouse is working, the stay at home spouse may still need some life insurance because if they pass away, sure they weren't making any income, but perhaps you're saving money on daycare and and things of that nature.

Speaker 1 (05:47):

So there's still some expenses that are there, but you just wanna ask yourself, how much do I wanna provide for my spouse? And then for how long? So you probably don't need to provide a hundred percent of your income through life insurance for your spouse. And there, and there's a couple reasons for that. The first reason is expenses for your surviving spouse should be less because you're not around and you're not spending money along with them spending money. So technically, hopefully their expenses go down a little bit and it's probably gonna be about 25%. They're not gonna go down by 50% because you have a lot of the same home related costs that that don't go down. You might have a mortgage or your electric bill, your water bill, those type of things don't go down too much just because one person's not in the house.

Speaker 1 (06:38):

Things that do go down, maybe gas, maybe groceries, things of that nature. And the other reason that you probably don't need to provide a hundred percent of your income to your spouse is because when you're working, your income is taxed, life insurance proceeds are tax free. So if you make a hundred thousand dollars and you pay 20% taxes on average, on that 100,000, you're only bringing home 80,000. So if you wanna provide your spouse with a hundred percent of your income, you really wanna look at the after tax pay, your take home pay. And again, you probably don't need to take to provide a hundred percent because we just talked about their expenses going down. So if you make a hundred, you pay 20% in taxes, on average, you're taking home 80,000. If you wanna provide your spouse with 75% of your income, then maybe you need $60,000 per year to provide to your spouse, and that's gonna be an a tax-free death benefit.

Speaker 1 (07:38):

Now I'm saying per year, life insurance proceeds aren't paid out on a per year basis. They're usually paid out in a lump sum. So you have to think about how many years do I want to provide this income for my spouse? Do I wanna provide 60,000 for 10 years? If so, you need roughly $600,000 of a death benefit. Now, maybe you wanna provide it for 20 years, maybe you're younger, maybe you wanna provide it for 30 years. So you just need to think about that and then add up those numbers, whatever amount you wanna provide. And then how long. You know, I talk to some people, they're a little bit younger, they say, you know, maybe I'm 35. I don't need to provide 30 years of income replacement for my spouse because I'm assuming after a period of time, hopefully they remarry and and they'll be taken care of.

Speaker 1 (08:29):

Well, that's a personal decision. That's something that everyone just has to think about for themselves. There's no right or wrong answer. So you might wanna give your spouse 10 years. You might wanna give 'em, give them 30 years, but you wanna give them enough time so that they can pay their expenses and also continue to save for retirement. If that's something that you were doing from your income, then they need to be able to do that. Otherwise, you're gonna have to build in a lot of years because it's not only the years to get you through retirement, it might be the years to get you through retirement. And insurance gets more expensive as we get older. Now, some of you out there may be closer to retirement and you may have enough saved up in your portfolio that if something happened to you, your spouse is already taken care of, maybe between what your spouse will get in social security, maybe you have some survivor benefits on a pension that you have coming in.

Speaker 1 (09:22):

So if you pass away, they're gonna get a portion of your pension. I, if you've got all these things in place, you may not need life insurance for the purpose of income replacement. Now you might want life insurance for some other reasons. And that leads me to my next question, question number five. And here we're talking about wealth transfer goals. Do you have a goal, a wealth transfer goal? Do you have an amount of money that you want to leave to your children no matter when you pass away? Say maybe you wanna leave a million dollars to each child, $2 million to each child. Not too many people want to do that. But if you have a certain amount of money that you wanna leave to your child, that's called a wealth transfer goal. Now you can use life insurance to help you accomplish this goal.

Speaker 1 (10:09):

Now, this goal is different than all the previous reasons you might need. Life insurance, all the previous things we've talked about, typically term life insurance can cover all of those risks. But for this one, this particular goal is gonna require permanent life insurance because if you want your children to inherit a million dollars each at your death, no matter when you pass away, well life insurance can can help with that. But we don't know when you're gonna pass away. So you would need to get a death benefit that is not going to expire. See, a term life policy is gonna essentially expire at the end of the term, but a permanent life insurance policy will be with you for your entire life. Because if you think about it in the previous examples, if you're getting life insurance to cover your mortgage, to be able to pay off your mortgage and your mortgage is going to be paid off in 20 years, then that risk is gonna be gone 20 years from now.

Speaker 1 (11:10):

That will expire at some point. If you're getting some life insurance to help your kids get through college, that need is only gonna be around for 15, 20 years or whenever they're gonna go to college. If you need life insurance or you're using life insurance for income replacement and you wanna provide income to your spouse for for 10 or 15 years, that need is gonna expire if you indeed live through that 10 or 15 year period. A wealth transfer goal, however, is always going to be there no matter when you pass away. If you want to leave your kids a certain amount of money, you're gonna wanna make sure you have insurance in place to help you accomplish that goal. And last but not least, question number six. Are you at risk of having to pay estate tax at your death? Or are your heirs at risk of having to pay estate tax at your death?

Speaker 1 (11:58):

And this is really on the other end of the spectrum here, talking about life insurance for totally different reasons. This is when in Illinois, if you are at risk of paying estate tax, it means that you are passing away with over 4 million or over 8 million if you're a married couple. And on the federal level, we're talking about having over $13.6 million in 2024. So if you have over that amount, then you are at risk of paying a state tax again, or your heirs, I should say, would have to pay a state tax at death, which is an additional tax is not income tax. It's an additional tax because you died with too much money and those taxes can be quite high. In Illinois, it's a bit of a complex calculation. It it's somewhere up to 16% of your estate, and it does go back to that first dollar.

Speaker 1 (12:52):

So if you pass away with four and a half million dollars, you could be looking at hundreds of thousands of dollars of estate tax in the state of Illinois. And this is where we're primarily located, which is why I talk about Illinois. On the federal level, again, we're talking about 13.6 million and the amount over that would be taxed and the maximum estate tax rate is 40%. So these estate taxes can add up very quickly, but this is something that you can do through life insurance using one tool is an irrevocable life insurance trust, also called an islet. And basically the goal is to get money out of your estate, but put it in a life insurance policy and still it can go to your kids at your death, but it allows you to reduce the size of your estate. Again, if this applies to you, you wanna make sure and go to retirement power hour podcast.com, click work with me and schedule a call with us because we'd be happy to walk you through this.

Speaker 1 (13:52):

This is a little bit more complex if you're in this situation. So how much life insurance do you need? Well, if you need 500,000 to pay off your mortgage, if you need 500,000 for future college education costs for your children, future weddings, future home purchases, maybe you need a million dollars for income replacement for your spouse. If you were to pass away, that's 500, 500 a million, that's $2 million. So that's a good place to start. That's a pretty accurate number if those were your numbers. But you just wanna tally up your numbers from each category and that that will give you a nice and accurate total of how much life insurance do you need? You may go through every category and have 0, 0, 0, 0. If so, great. Then you know that you don't need any life insurance. Isn't that nice to know? You don't need any, you're covered through your other investments.

Speaker 1 (14:42):

Now, for those that do, again, I gave 2 million as an example. The good news is the younger you are, the less expensive life insurance is. And yes, the older you get, the more expensive it is. But also the older you get, the less life insurance you tend to need because your mortgages are getting paid off. Your kids are grown, so you don't tend to need as much life insurance as you get older. But once again, if this is you, go to retirement power hour podcast.com, click work with me. If you don't think you have enough coverage, if you're not sure, if you want someone to walk through this exercise with you, go there, set up a call, we'll have a a, an introductory call, no obligation. We'll talk through your situation and just kind of walk you through this exercise and see about how much life insurance is right for you.

Speaker 1 (15:27):

Now, one of the most important things about this whole thing is getting the right type of life insurance. If you just need term insurance and someone is trying to sell you permanent life insurance, whole life, for example, that's much, much more expensive, then that may not be in your best interest. Okay? Now, there may be a different use for that. There may be a different purpose, a different goal in mind, but for everything that we talked about today for Pure Death benefit to cover these risks that might be out there for you, term life would cover almost all of them. Four of the six reasons, term life would cover those for a well transfer goal for estate tax planning. Yes, you will need a type of permanent life policy, but again, all of this goes back to you gotta get the right type of policy, and so you wanna find someone who's independent, who is a fiduciary, who can guide you down the right path if this is something that you're looking into. Now, if this episode was helpful for you, we would really appreciate if you would leave us a review. You can do that on Spotify, on Apple. You can search us on YouTube as well and leave us a review there. Again, we would really appreciate it. With that, that is it for episode 33 of the Retirement Power Hour, where we help listeners invest wiser and retire better. We'll see you next time.