Insurance: Life Insurance, Too Much, Too Little, Or Just Right?

by : Jeffrey Voudrie

The thought that you may not need life insurance is anathema to most life insurance agents. But as a Certified Financial Planner who is also a life insurance agent, I have a different point of view. There are times when you may not need life insurance.

To me, there are three reasons to have this insurance. You should use it to provide a way to replace the breadwinner's income in the event of premature death, as a means to pay future estate taxes for pennies on the dollar or to employ some exciting special-situation strategies. Otherwise, you may not need life insurance and could better use that money to fund higher priority items like Long Term Care Insurance.

Using life insurance to replace the breadwinner's income during the earning years prior to retirement 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. Because of our life insurance policies, my wife and I take great comfort knowing that our family would be well cared for should either of us pass away.

If you don't have enough insurance to replace your income should you die, you could be placing a tremendous burden on your family. For single parents it is even more important!

A simple rule of thumb to determine if you have enough insurance is to divide your salary by .05. For example, if you earn $50,000 per year you should have approximately $1,000,000 in life insurance. In most situations, I recommend 10, 20, or 30-year term insurance as opposed to permanent insurance. Get the length of term that will take you to your retirement age.

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. Don't cancel that policy yet, though, because you may need it for other reasons.

An individual can pass $2 million to heirs free of Federal estate tax. If you've successfully accumulated more than this then you may need life insurance to pay for future estate taxes.

Even with the recent changes in estate tax laws, many still find themselves facing hundreds or thousands of dollars in estate taxes at their death. With proper planning, married couples are able to pass $4 million to their heirs in 2006 without incurring Federal estate tax. Unfortunately, few married couples have the proper plans in place and end up forfeiting one exemption which results in reducing that amount to $2 million.

Life insurance is a wonderful way to pay death taxes without eating into the estate itself.

This is particularly true when a large percentage of an estate is tied up in non-liquid assets, such as real estate. In those cases, those assets would have to be sold in order to pay the taxes.

With the proper use of this insurance you can avoid these situations entirely, and do it 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 the insurance is for special-situation strategies. There are unique strategies that will dramatically increase the amount of support you can provide your favorite charitable causes or provide a financial safety-net for your loved ones for generations.

Even those of modest means can provide literally millions of dollars to worthy causes, while passing on a legacy of giving to future generations. Very few are aware of these strategies.

If you don't fit one of these situations you may no longer need life insurance. Don't take this decision lightly, though, especially if your health has diminished.

Also, depending on your age and health, you may get more by selling your policy instead of canceling it. Consult a qualified, unbiased professional prior to canceling your policies just to make sure.