How much Life Insurance do you need?

All Things Financial

Volume 17 No. 4
By Charles P. Jones, CFP®

While ensuring the financial security of loved ones is a critical use of life insurance, there are other ways it can be used to meet planning goals throughout your life.

Whether you are married or single, a parent, or without children, life insurance can play a key role in your financial plans. However, millions of Americans have no life insurance coverage whatsoever, and of those who do, many may not have enough.

Appreciating the importance of having adequate life insurance is one step, while assessing your own unique needs is quite another.

Where to Start

Family photoMany people obtain life insurance when they first have children and then forget about it, except for when the premium bill comes due. But an effective financial plan includes reexamining your life insurance needs continually throughout your life to ensure the assets you’ve accumulated are protected and to provide additional opportunities to create wealth.

As a starting point, determine your net earnings after taxes as well as your routine living expenses. Other factors to include in your calculations include:

  • Any outstanding debt that you owe, such as a mortgage or education loans.
  • Future tuition bills for your children.
  • Funeral and/or potential uninsured medical costs.
  • How much your surviving spouse might need to adequately fund a retirement nest egg.

Generally, you’ll want a benefit that will cover all of these expenses. Some planning specialists believe a good rule of thumb is to buy a policy that would provide the equivalent of five to seven times your annual salary. That standardized approach may work for some people, but in reality your decision may not be that simple.

Investing in your familyWhile ensuring the financial security of loved ones is a critical use of life insurance, there are other ways it can be used to meet planning goals throughout your life. For instance, people in their peak earning years can use life insurance to protect their wealth while accumulating additional tax-deferred assets. Older people can use life insurance as an integral part of an estate planning strategy designed to pass more wealth to future generations.

What Type of Policy Is Right for You

Once you have an idea of the coverage you need, evaluate whether term life or permanent life insurance is more appropriate for you. Term life is the more basic and less expensive form of life insurance — particularly for people under age 50. A term policy provides coverage for a predetermined period of time, typically one to 10 years, but policies are also available for longer terms. Premiums increase at the end of each term and can become prohibitively expensive for older individuals. Unlike many other policies, term insurance has no cash value and benefits are paid only if you die during the policy’s term.

Permanent life insurance combines death benefit protection with a tax-deferred savings component. With permanent life insurance, as long as you continue to pay the premiums, you are able to lock in coverage at a level premium rate for the life of the contract. Part of that premium accrues as a tax-deferred cash value. As the policy’s value increases, you may be able to borrow up to 90% tax free at attractive interest rates. If you do not repay the borrowed money, it will be taxable as income at then-current rates. And if you’re younger than age 59 1/2, you may also be subject to an additional 10% IRS early withdrawal penalty.

Determining the right type and amount of life insurance coverage you need is easier said than done. Your financial professional can help you make an accurate assessment of your needs.

March 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by charles P. “Chuck” Jones , a local member of FPA.

Siblings Are Forever

SiblingsEven though there is not much attention given to sibling relationships in old age, researchers have shown that having brothers and sisters can significantly benefit us in later life. Possibly because siblings share memories and a sense of family identity, people with siblings report higher life satisfaction and lower rates of depression in old age. In times of illness or crisis, siblings are shown to provide emotional and psychological support to each other. This exchange of support is common between siblings who live far away as well as those who live next door to each other.

Why are sibling relationships so important?

  • While friendships come and go, sibling relationships are permanent. We cannot choose our siblings as we do friends; that is what makes this relationship unique.
  • The sibling relationship has the longest duration of any human relationship! Next to our parents, who often know us from birth to adulthood, our siblings are likely to know us even longer. Because most siblings are within 10 years of age, we are likely to share a relationship for more years than any other family relationship.
  • Our siblings share with us a lifetime worth of memories and stories. For example, your sister may be the only other living person who remembers that vacation to Niagara Falls when you were children or your brother is the only one who can remember how your grandpa used to eat your vegetables behind grandma’s back. This shared history is priceless and becomes more valuable as we age.

How do sibling relationships change over the life span?

Not surprisingly, many of us begin our lives having close contact and a growing emotional bond with our siblings. Except for moments of sibling rivalry, we often turned to our siblings for entertainment, support, and advice. As we get older, however, the sibling relationship often changes:

  • Once individuals reach adulthood, it is common for siblings to “go their separate ways” in order to establish their identity and independence, pursue employment, and establish a family of their own.
  • During late middle-age siblings often “find each other” and establish close ties once again.
  • Significant life events (death, divorce, birth of grandchildren, relocation, retirement, illness) can cause siblings to renew their contact. Earlier rivalries or conflicts are often put aside in the desire to share this re-discovered relationship.

What can we do to enhance sibling relations?

Because sibling relationships can be so beneficial in later life, it is important to nourish interactions with siblings in adulthood and among our children.

Between children:

  • Parents need to foster and respect the sibling relationships among their children.
  • Provide siblings with opportunities to share time and activities, despite differences in age.
  • Be sure no “favoritism” (the most common cause of bitter sibling rivalry that can last into later life) is practiced by parents or other extended family.
  • Allow siblings to work through their own disagreements therefore building a relationship with each other that is separate from their parents.
  • When older siblings begin to leave home, encourage them to maintain contact with their younger siblings and facilitate these interactions with family events.

In adulthood:

  • Parents need to facilitate and maintain strong sibling ties with their own sisters and/or brothers in adulthood. These relationships will serve as models of healthy sibling interaction for their children.
  • Establishing and maintaining good sibling relations in adulthood often depends on the development of positive relations with sisters and brothers-in-law. Adult siblings need to make an extra effort to establish a mutually respectful and congenial relationship with the spouse of their sibling(s).
  • Adult siblings must practice mutual support and cooperation during times of stress or family upheaval. This collaboration will continue into later life and serve as a source of emotional, psychological, and instrumental support.
  • Research shows that it is often sisters who maintain contact with siblings and facilitate interaction and communication. Adult siblings, especially brothers, need to take the responsibility of maintaining continued contact with each other.
  • Important life events are occasions for siblings to interact. These events serve as opportunities for siblings to strengthen or even repair sibling ties. Giving special attention to these events and providing time to share with siblings is important.

Source: Ohio State University Extension’s “Aging in Ohio” website

Chuck’s Comments

31 Number of states that cut aging and disability programs in fiscal year 2010, 28 anticipate doing so in FY 2011. (Source: AARP)

2 Number of cities where home prices are increasing on a year-to-year basis: San Diego & Washington, DC. (Source: S&P/Case-Shiller Home Price Indices)

52 Percentage of American adults who own investments—at least $5000 in stocks, bonds, or mutual funds. (Source: Rasmussen Reports)

6.6 Billion dollars Total earnings of federal savings banks, or thrifts, in 2010, the first profitable year since 2006. (Source Data: US Office of Thrift Supervision)

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