For many people, life insurance plays an integral role in their comprehensive estate plan. If you purchased a life insurance policy several years ago, it may be time to re-evaluate that policy. If there have been changes to your family and/or your estate, you may need to make corresponding changes to your life insurance policy. To help you get started, the Indianapolis estate planning attorneys at Frank & Kraft help you figure out if you have the right type and right amount of life insurance.
What Type of Life Insurance Best Suites Your Needs?
There are advantages and disadvantages to the various types of life insurance available. The type of life insurance you needed when you were 25 years old and without children may not be the same type you now need as a 35-year-old with a spouse and children. Knowing the basic types of life insurance options can help you decide if you have the right type of policy for your needs. Although there are hybrids options, the basic types of life insurance include:
- Term Life Insurance. The simplest and least expensive option, term life insurance is purchased for a specific amount of coverage and a specific term. The premiums are fixed; however, the policy has no cash value. If the insured outlives the policy, or there is a lapse in premium payments, no benefits are paid.
- Whole Life Insurance. Offers a set coverage amount for the lifetime of the insured. Premium payments are usually fixed and more expensive than term insurance; however, you get a savings component that earns dividends from the insurance company.
- Universal Life Insurance. Initially purchased with a set coverage amount; however, you may have the option to increase the coverage down the road. Premiums may also be flexible once you have accumulated sufficient cash value in the policy and you can borrow against the cash value. A universal life policy, however, has a termination age. If you outlive the termination date your beneficiaries won’t be entitled to any death benefits.
- Variable Life Insurance. Combines life insurance with investing. Once you accumulate savings, those savings can be invested in stocks, bonds, or mutual funds. Premium flexibility is also available once you have sufficient cash value in the policy.
Do You Have the Right Amount of Life Insurance?
How much life insurance you need can also change as your life circumstances change. While there is more than one way to calculate how much life insurance coverage you need, some common methods include:
- Assets minus debts. This is simple enough; however, it only covers your debts without leaving any additional funds for loved ones. Simply add up the value of all your assets and subtract the amount you owe in debts. Include at least a cushion for additional debts and/or funeral expenses.
- Assets minus debts plus future income. This is a variation of the first method. When calculating your assets, take your yearly income and multiply it by the number of years you wish to replace that income. Add that to your total debts and subtract them from assets. You will likely get a negative number that represents how much life insurance you need.
- 10 times your income. As it sounds, this method just takes your yearly income and multiplies it by ten to roughly estimate how much coverage you should have.
- 10 times plus $100,000. This uses the 10 times your yearly income formula and adds an additional $100,000 per child for college expenses.
- DIME. The most complex of the formulas, DIME stands for debt, income, mortgage, and education. To use DIME, add the following:
- Debt and final expenses: Add up your debts, other than your mortgage, plus an estimate of your funeral expenses.
- Income: Decide for how many years your family would need support and multiply your annual income by that number.
- Mortgage: Calculate the amount you need to pay off your mortgage.
- Education: Estimate the cost of sending your kids to school and college.
Contact Indianapolis Estate Planning Attorneys
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about incorporating life insurance into your estate plan, contact the experienced Indianapolis estate planning attorneys at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.
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