Nothing is certain except death and taxes, and your family will be hit with both when you pass away. Instead of letting the government take cash out of your beneficiaries’ hands or expecting your survivors to declare bankruptcy, you can use life insurance as an inexpensive buffer. Follow these three tips and learn how to pay for your death without going broke.
1. Calculate the Amount of Insurance Needed
Some people guess on the amount of life insurance coverage they need, and they end up in one of two situations:
1) They pay for insurance they do not need, so they make the life insurance companies rich and keep their families poor.
2) They don’t pay for enough insurance, so their families are burdened with large debts after their passing.
Instead of guessing, you can use a simple worksheet to figure out the exact value of life insurance that you need. This calculation includes both immediate expenses, payable soon after the death, and long-term expenses, payable over months and years.
Immediate Expenses
- funeral service: $3,000
- burial (cemetery, vault, casket) or cremation costs: $2,000 to $4,000
- medical bills (nursing homes, hospitals, doctors)
- estate taxes
- attorney fees
- unpaid debts (mortgages, car loans, credit card debts)*
- charitable donations
- legacy payments to beneficiaries
Long-Term Payments
- survivor support (groceries, gasoline, utilities, personal services, etc.)
- college education for children
- inflation, which lowers the future value of money saved or paid out today
Long-term expenses are related to how much your family will need for financial comfort. For example, an 89-year-old widower typically needs less than a 34-year-old homemaker with four children.
The simplest calculation is:
Amount survivors would need annually
X Number of years to provide this income
Total amount needed before taxes and inflation
* Term life insurance is ideal for protecting your family against debts that you will pay down over time. For example, you can apply for a 5-year term life insurance policy and cover a 5-year auto loan. If you die before the loan is paid off, the insurance will kick in and pay. If you pay off the loan early, you can usually cancel the policy.
2. Buy Life Insurance Policies
After you know how much life insurance you need, you can buy the policies. The two main types are term life and whole life. Both types of life insurance policies are available with or without a medical exam.
If you are ready to buy a life insurance policy to protect your family, consider using this insurance comparison site. Get free quotes from stable, reputable life insurance companies like Prudential, ING, West Coast Life Insurance Company, Genworth, Fidelity Life, and Transamerica.
3. Reassess Annually
Life insurance needs change throughout young adulthood, middle age, and the golden years. When you are a single person renting an apartment, your life insurance needs can be very small. Then you get married and you need to account for your wife or husband. You have your first child, and now you have to factor in years of education expenses and rising college tuition. When your kids finally move out and you have paid down your mortgage, your life insurance needs have changed once again. Then the grandkids come along.
The best way to track all of these changes and keep your life insurance policies up-to-date is to reassess your situation each year. Make a note on your calendar, and sit down with your financial advisor. Remember that most insurance agents will want you to buy more insurance, so they make money. Be sure to understand your own needs so they won’t be controlling your finances for you.
Ways to Decrease Life Insurance Costs
Cheap life insurance is easy to come by, but most people would still like to save a little cash. These tips are just some of the ways you can save money and still provide for your family after your death. Keep in mind that these tips are not professional advice. Always check with a lawyer, financial planner, or insurance professional before making changes to your estate.
- Give gifts to beneficiaries yearly instead of waiting until death. Individuals can currently give up to $13,000 without either party being penalized by the IRS.
- Prepay for funeral arrangements.
- Transfer your house into a spouse or child’s name instead of allowing it to sit as part of your estate.
- Consider trusts and other legal instruments to limit tax burdens for your estate and for your beneficiaries.
- Save a nest egg to replace your life insurance. Term life policies and permanent life policies are not always the best investments for your extra money.
