“How Much Life Insurance Do I Really Need?”

The question usually comes up in regard to insurance planning: “How much life insurance do I really need?” This implies of course that the belief is held that either the amount recommended is incorrect or perhaps the insurance isn’t needed altogether. 

We’ll go over a specific scenario below.

Richard writes in: “I’m 36, recently married, and my wife has two kids from a prior marriage. As soon as we started to get serious, we met with a financial planner and of course one of the first things the planner wanted to talk about was insurance. He immediately recommended a $1,000,000 term policy.

I have a policy for $50,000 at work, so I should be covered, correct? Why would my beneficiaries need more than that? It should cover burial costs and give them something left over too if I am to pass.”

Richard, thanks for writing in. For starters, the planner has one advantage that I don’t: the ability to ask you questions in a more direct format. 

That being said, I will speak first more generally and then get to specifics.

In general, if a person has a need for life insurance, their policy at work is usually not enough. 

The reason being is that yes, it could be enough to cover burial costs but usually if you have a need to do that, it means that you have other dependents that will rely on more than that and were likely relying on your income. 

Now this gets into the specifics as to whether your work policy is enough or not. Your planner likely asked if your new wife and her children are dependent on your income, or if your wife is able to support herself if something happened to you.

If your wife and new children are unable to support themselves in the event of your passing, they will need income replacement likely for perpetuity, not just a few years.

This is where the idea of a large term policy (around $1,000,000) comes into play. That large of a face amount placed into an interest-bearing account should give your beneficiaries a sizable income to help replace the income they lost from your passing. 

I hope this information helped, Richard.

 


Thank you for reading and feel free to leave a comment below to have your question featured. 

This article should not be considered legal or tax advice. Always consult a professional for advice on your specific situation.

 

How Much Should I Have in an Emergency Fund?

We’re all on the path to better ourselves financially, and a big part to that is having a safety net. When it comes to our finances, that safety net takes a few different forms; but usually this boils down to a form of insurance.

And an emergency fund is insurance against going into debt.

A question we get a lot is: “How much money should I have in my emergency fund?”

The good news and the bad news is the same in this case: There is no right answer. Everyone is going to be different. At its core, the answer to this question is “however much money you need to have saved up not to go into debt in the case of an emergency.”

But What Do the Experts Recommend?

Financial planners generally recommend that you save up three to six months worth of expenses in an emergency fund. It is important to remember that we’re talking about three to six months worth of expenses, not income.

Look at your budget and determine how much money you have going out in expenses that are required to live every month. This does not include money going toward savings, investments, charities, etc. That income is strictly surplus money in the budget.

What Do You Recommend?

Generally, we recommend the same as the experts. Three to six months should suffice most financial catastrophes. But we like to call the number that works for you and your spouse the Sleep at Night Number.

What number in your savings account helps you sleep at night? What number in your account helps you not worry about what your investments are doing? What number helps you and your spouse not feel stress about money?

That number is your sweet spot.

What number helps you sleep at night? Do you agree with the experts with three to six months or do you have a different idea of what should be in your savings account?

 


This article is not intended to be financial, tax, or legal advice. Please consult a local professional for help with your specific situation.

Should I Pay Off Debt and Invest at the Same Time?

We all want to pay off debt. And we all want to put more money into our retirement plans (401k’s, IRA’s, etc.). But do these two things conflict?

They shouldn’t. They’re both working towards the same goal: a better financial future for yourself.

So Do I Invest While I Pay Off Debt?

We hear the argument made all the time: “Why would I pay off debt at 3-4% interest when my investments make an average of 6-7% every year? I can make the minimum payments on my debt and invest and come out ahead.”

Look, we get that you can crunch the numbers. But this is personal finance. And it is important to remember that nothing in personal finance makes mathematical sense. Personal finance is almost entirely psychological, not numerical. And that statement alone is enough to make a person with a finance degree cringe.

If we made personal financial decisions based on what made numerical sense, we wouldn’t have debt in the first place.

So I Shouldn’t Invest While Paying Off Debt?

Yes. Saving and paying off debt are conflicting goals. This has nothing to do with the numbers making sense or that both of these actions help work toward your future.

They conflict because you can only do one thing aggressively at a time. If you try to pay off your pile of student loans at the same time you are trying to grow your investment portfolio, you will lose your mind. You will get burnt out and give up.

It is so important to feel small victories when working on yourself financially, just like it’s important to have small victories when dieting or exercising. This is where the psychological side of personal finance comes into play.

The balance in your 401k won’t matter when you have hundreds of thousands in student loan and credit card debt. The stress will pile up from the debt and your IRA won’t be there to comfort you until you turn 59 ½.

But what do you think? Have you gotten out of debt at the same time you invested? Do you think it’s more beneficial to focus on paying off debt before investing in mutual funds?

 


This article is not intended to be financial, tax, or legal advice. For help regarding your specific situation, please consult your local professional.

Why Claim Dependents When There Is No Benefit for 2019 Taxes?

Claiming a dependent on your taxes has always yielded what is called an exemption. This means that a certain amount of your income was exempt from taxation. For 2017, the amount of each dependency exemption you were able to claim meant that $4,050 of your income was not federally taxable income.

For example, a family with four children would be able to claim six exemptions (four dependency exemptions and two personal ones for the mother and father). This means that the family would have been able to exempt $24,300 (6 x $4,050) from their income.

But with 2017’s Tax Cuts and Jobs Act, your ability to claim a dependency exemption was eliminated. However, please note that the ability to claim a dependent was not eliminated.

So Why Would I Claim a Dependent If I Do Not Receive an Exemption?

Claiming a dependent still enables you to receive certain credits or enhance the benefits of claiming certain credits.

For example, the Earned Income Tax Credit increases the amount a person receives as their refundable credit when they have a dependent on their return.

Also, the Child Tax Credit was expanded and now yields a $2,000 reduction in taxes instead of last year’s $1,000 reduction.

In addition to this, claiming dependents also affects who is able to claim education credits and deduct student loan interest, whether it be the actual student or the parents.

Credits are much more powerful than exemptions and deductions because deductions only reduce your taxable income. Credits are a dollar for dollar reduction in either the tax you owe or a dollar for dollar increase to your refund.

 


This article does not constitute financial, legal, or tax advice. For help regarding your specific situation, please consult a local professional.

When Should You Buy Term Life Insurance?

Thinking about what kind of life insurance to buy can make your head spin. First you have to comprehend what the different kinds of life insurance are, and then you have to think of the applications of that policy and how it might affect you and your family.

And, while this isn’t the best forum to discuss what kind of life insurance to buy due to having a general audience, we will help to go over what some kinds of applications for term life insurance are and when buying it might be advantageous over buying a permanent policy.

So What Is Term Life Insurance?

We’re going to specifically be discussing level term life insurance. We have to specify because there are several types of term life.

Level term life insurance is a fixed premium insurance that insures a person’s life for a specific amount (death benefit). The term will usually be 10, 20, or 30 years. After that term is over, the insurance will expire and if the insured further wants to be covered by life insurance, they would have to reapply, at which point insurance coverage would likely be considerably more expensive.

So When Should I Buy Term Life Insurance?

The timing for when to buy term life insurance is usually triggered by a life-changing event: getting married, having children, etc. As soon as a person has others relying on them, that will generally be the best time to consider buying a term life insurance policy. The reason for this is because if that person is to pass away, their spouse, children, or whomever they name as beneficiary will receive the death benefit outlined in the policy.

In general, level term life insurance is best when coverage is only needed for a specific term. If a family believes that they only need coverage during their accumulation phase when they are saving for retirement, their kids’ college expenses, and any other expenses that come up during that time, term life insurance for a 20 or 30 year term might suffice.

Some people fail to save enough for retirement in time and as they approach it, and they may be scrambling to save everything they can. Without sufficient saving reserves at the moment, a term life policy for 10 years (although considerably more expensive due to age) might make sense for them.

You’ll want to own term life insurance when you need the coverage for a specific term and only the specific term. Otherwise, if you would need to be covered for your entire life, it might make sense to look at owning a permanent life insurance policy.

Another strategy that a family may use is to own a large term life insurance policy as well as a modest permanent life insurance policy during the accumulation phase. As retirement approaches and their savings are enough to cover them in event of a disaster, it may make sense to drop the term life insurance policy and keep the smaller permanent life insurance policy in force because they no longer have the need for a lot of coverage.

We will look at this strategy and many others in-depth in future posts.

 


This article does not constitute financial advice. For information regarding your specific situation, please consult your local financial advisor.