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How Much Insurance Do You Really Need?

When estates as low as $600,000 were subject to tax (as recently as 1997), having life insurance was often an important tool in estate planning, to prevent surviving family members from a financial setback.  Even though estates up to nearly $11.2 million are now sheltered from federal tax, life insurance remains an important part of an estate plan for many people.  Millions of people own life insurance policies through work or policies bought when they were married or had their first child.

How much life insurance is enough?  Financial planners often use a needs approach when answering that question.  Among the factors to consider:

Expenses at death — Make sure your estate has enough liquid assets to cover funeral expenses, the cost of any last illness and probate fees and expenses.

Short-term income needs — The mortgage, utility bills and day-to-day living expenses will continue unabated.  There should be sufficient insurance to cover these expenses without a drastic change in the family’s living standards.

Long-term income needs — The impact of lost income will depend upon whether the insured is the sole wage-earner, whether there are minor children to raise and educate and other sources of income such as Social Security.

Special needs — Coverage to pay off a mortgage, care for family members with special needs or provide a fund for educating minor children also should be considered.

As family circumstances change, your need for life insurance will probably also change.  If you find you have a policy that is no longer needed for family security, consider a charitable gift of the policy, which entitles you to an income tax charitable deduction.


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