Life Insurance: Do You Have Too Much?

Posted by Nick Niesen on October 29th, 2010

When you discuss your life insurance needs with a broker, are you sure you are asking the right questions or do you feel that you are still confused? Let's take a look at the function of life insurance and see if yours is working for you.

The Four Reasons To Have Life Insurance

It provides security in case the main breadwinner in the family dies.

It provides money for charitable causes

It could pay future estate taxes

It could also provide a pension

If your life insurance isn?t capable of replacing your main breadwinners' income, then you need to have more. The situation is even more important if you have children at home. There are many people who fail to protect their loved ones in this way. Also being able to pass on life insurance money to the next generation, can significantly lighten the financial load for your loved ones.

The second reason is giving to future generations. By specifying donations, you can provide relief to your favourite charitable organization.

Life Insurance Can Help With Taxes

If you?ve accumulated a lot of worldly goods, your life insurance can help to pay for the estate taxes. If you are unprepared, your heirs may face thousands of dollars in taxes after your death. Life insurance is a great way to pay those death taxes without eating into the estate itself.

Reassess Your Life Insurance After Your Working Years

Once you retire you may not need life insurance. If you have sufficient financial assets and your mortgage and children?s education are paid, then you can reassess your life insurance at that time and perhaps drop it entirely. But it is always advisable to consult a broker before making any major changes in your portfolio of life insurance.

How To Calculate How Much Life Insurance You Need

If you have a growing family, the life insurance coverage has to generate enough income to support that family.

When you die the life insurance coverage becomes the life insurance capital and that capital has to be invested conservatively to generate the needed income.

Let's say you leave $1 million to a spouse and three children which, invested at 5%, will generate $50,000 before taxes. Is that sufficient? If so, that's what you need.

But What Happens To This Life Insurance Capital?

Here's one scenario. Your children grow up and leave. Your spouse their converts the $1,000,000 into an annuity or just continues the income as a pension. And that is one way you can be helped by life insurance.