Life insurance often plays an important role in a comprehensive estate plan. People frequently purchase an employer sponsored life insurance policy when they are young and then effectively forget about the policy – and the coverage. If you purchased a life insurance policy years ago, both the type and amount of coverage may be outdated and not meet your current needs. You might have more, or less, coverage than you need. Moreover, a different type of coverage might better suit your current estate planning needs and goals. With that in mind, a Beverly estate planning attorney at DeBruyckere Law Offices helps you decide if you need to update your life insurance coverage.
What Type of Life Insurance Policy Do I Need?
There are several types of life insurance policies that all offer advantages and disadvantages. The type that was right for you as an unmarried, childless 25-year-old may not be right for you as a married parent of four at age 40. The basic life insurance options 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 I Need More, or Less, Coverage?
Just as the type of life insurance that is best for you may change over the years, the amount of life insurance you need may also 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. Simple 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 multiple it by the number of years you wish to replace that income. Add that to your total debts and subtract 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 by ten as a way to roughly estimate how much coverage you should have.
- 10 times plus $100,000. This uses the 10x 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 a Beverly Estate Planning Attorney
For more information, please join us for an upcoming FREE seminar. If you have additional questions about updating your life insurance to meet your current estate planning needs, contact a Beverly estate planning attorney at DeBruyckere Law Offices by calling (603) 894-4141 or (978) 969-0331 to schedule an appointment.
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