The Finance Blogger


Estate Planning Life Insurance

Estate Planning Life InsuranceEver wonder what life insurance and estate planning have to do with each other? Well I did until I started looking into it. One day I was trying to figure out if I should keep the life insurance I have had for the past 30 years. I initially purchased it to have insurance in case something happened to me. The family would need money to survive. I wanted to make sure that my wife would be ok financially. Also that my kids would have enough money to go to university. I ran through all of the calculations at the time to make sure there would be enough money.

Estate Planning Life Insurance – Update Your Insurance Needs and Plans

Well that was 30 years ago and I still have the same insurance and was wondering why I continued to keep paying for this insurance. I spoke to my financial adviser about it and he suggested that I take a look at my current cash flow and determine what the impact would be if I passed away. The kids are fine and out working. They are on their own, but my wife is not and would need to be able to pay the bills etc.

So by asking what the impact on the cash flow would be if my income stopped my adviser triggered me into doing some estate planning and life insurance. So when I calculated the change in income, I quickly realized that my wife would not have a very good life if something happened to me and my pension stopped etc. the answer of course is life insurance which would provide enough capital to sustain my wife in her current lifestyle.

A Life Insurance Illustration

An illustration is probably appropriate at this time. You will have to use your own numbers of course and I have used easy numbers to illustrate, however you will get the idea. Let’s assume that the family income would drop by $10,000 a year if you passed away. Probably not realistic, but this is an easy number to use. Basically you need enough life insurance to generate this income. If you decide to live on the income only, then you would need $100,000 invested at 10% to generate $10,000 a year in income, so in this example a $100,000 life insurance policy would be sufficient. Today most investors would tell you that you would be lucky to generate 5% on your investments, so you would probably need $200,000 in life insurance. This would go indefinitely as long as you never touched the principle.

Now lets assume that you are 65, your spouse is 65 and you will live to the age of 90. You want to draw the maximum income you can. Under the same assumptions you have $200,000 in insurance, how much can you draw assuming a 5% interest rate? The answer will be $200,000 divided by 25 or $4000 a year plus a declining interest income. In the initial year the income would be $4000 principal plus $10000 in income. The following year you would take out another $4000 and the interest rate would generate .05 times $190,000 or $9,500, a drop of $500.

How Much Life Insurance Do I Need

With all of this analysis I conclude that I still needed to have life insurance to ensure that my wife would have sufficient income after I pass away. The amount I need does decrease the longer I live. The other reason for estate planning and life insurance is that you want to pay all of your debts when you die. If you owe $25,000 to a credit card or personal loan, then your estate needs to pay this amount before anything is paid out to the survivors.

We have come to the conclusion that we need to do estate planning for our life insurance needs every year taking into account the income needed if one of us were to pass away  and also to take into account all of the debts that we may have. If there are no debts then estate planning is made a bit simpler as far as life insurance is concerned. Hope this helps our readers.

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