Life Insurance 101
We all know that the loss of a loved one leaves us with an emotional loss and a grieving process. But without adequate life insurance or financial resources on hand it can also leave us with a devastating financial burden. Here are some of the most common reasons to buy life insurance or reasons for insuring your love!
Reasons to buy Life Insurance
The #1 reason to buy life insurance is to replace income.
If someone depends on your income to support a household, for example your spouse and/or children, think of what would happen if you were removed from the picture. This is a huge lifestyle change. This is the main reason to buy for life insurance. Life insurance helps replace your lost income for several years. The amount of years is dependent on your age. The younger you are the longer you need to replace your income.
An unexpected death and the loss of an income places a large burden on survivors. Not only do they have an emotional burden, they now have a financial burden. In most cases, that financial burden causes a huge change in lifestyle and can sometimes include selling a home.
Most people ask, “how much insurance do I need?” Noah Insurance Group has a calculator that we use when discussing life insurance. We gather information and give you an amount based on your age, income, family (including the number of children and ages), and other assets available. These calculators do a great job calculating your needs and even have inflation built in. It takes into consideration outstanding debt, and college for children to name a couple of things. Normally this coverage is roughly 10 times the amount of your income. The younger you are the more you need and it can go above 10 times. If you have a non-working spouse, the general rule of thumb is to purchase half the amount of the income producer. Just because someone isn’t working doesn’t mean they don’t need coverage.
The #2 most common reason is to Cover a debt.
A debt would be like a mortgage or a loan balance for farm equipment. This coverage is sometimes required by banks to secure the loan. The bank wants to make sure the loan is paid back in the event you would die. The life insurance provides the money to pay off the loans and alleviates the stress to survivors. Normally people would buy term insurance to cover this risk because the debt is for a specific period of time. Learn more about Term Life Insurance here.
The #3 most common reason is Final Expense.
This type of coverage is usually smaller amounts between 10,000 and 50,000. It is used to pay for funeral expenses and any small debt that can remain at death. It is always permanent coverage, so it will be there when you need it. To be honest, how many of us can really afford to pay for funeral of a loved one? Not only is the death of a loved one an expense, there is also the grieving process and handling the estate. Life insurance mitigates that burden.
The #4 most common reason is to Pay Estate Taxes.
This is especially true for farmers and business owners. The assets can add up quick when you look at land, house, buildings and machinery. If someone has assets over the exclusion for estate taxes life insurance can be used to cover any estimated estate taxes due. Since they must be paid in cash in a timely manner, having that life insurance policy can keep the farm in the family. In 2017 federal exclusion was $5,490,000 per person and is now going to $11,180,000. However, Minnesota is one of only 18 states that impose an inheritance tax. This means in 2018 it was $2.4 million for the exclusion and is going up to $3 million by 2020 and staying level.
Noah Insurance Group has seen cases where land or other assets had to be sold to pay the estate taxes. This is also permanent coverage, so it will be there for you when you die. However, in most cases it can be covered on what is called a second to die policy. Instead of having two policies, the second to die covers two individuals and pays out at the second death. These policies are more cost effective and great for business owners and farm owners.
The #5 most common reason is Business and farm succession planning.
This allows you to equalize the estate and allow for the new operator to continue the operation. The amount of coverage is normally 1 to 1.5 times the value of business. Key person life insurance is also used in businesses and farm operations. This coverage insures a key person to the operation. If a key person to the operation were to die it could lead to a revenue loss that could be made up with insurance proceeds or the funds used to find a new person for that position. It basically gives the company or farm operating capital to continue.
Now, it doesn’t end here. Life Insurance is not a one and done process. Life always changes, your needs change over time, your family changes over time, your jobs change over time and this also holds true for business’ and farms. It is very important to have frequent reviews of your life insurance just like you do for your home, auto and/or business coverage.
Life changes should always trigger a review of your policies.
- Change in martial status or death in family
- Birth or adoption of children
- Change in job or business
You may need to update names but more importantly review your beneficiaries. Most people run into problems because the beneficiaries were never updated. Even if you don’t have any life changes it is a good rule of thumb to review beneficiaries every 2 to 3 years. When I do reviews I review all policies and any accounts such as retirement accounts to make sure the beneficiaries are up to date. The last thing you want is to have an invalid beneficiary or in worst case scenario have it go to an x when you are now married and have children. Have the proceeds go where they are needed!
We know you still have questions, and we are ready to answer them. Call our Amery or Osceola office to get connected with a Benefits Advisor:
Additionally, if you need a quote for your auto or home, click here! Or call one of Risk Advisors at the location closest to you.
FOREST LAKE: 651-464-2168
OR visit our website at www.noahinsurancegroup.com