Do I Need Life Insurance? How Much?

Contributed by: Josh Bitel, CFP®

Given the pandemic among other unfortunate news around the world, there has been an increased interest about life insurance quite a bit recently. There are many different ways to determine if, and how much, is needed. 

As your life changes, so do your needs for life insurance. You may not need it when you are young and single. However, as you take on more responsibility and your family grows, your life insurance needs may grow as well. Below are a few rules of thumb I like to use to start the conversation.

Estimating Your Life Insurance Need

There are several methods that you can use to estimate your life insurance needs. While the actual calculation may be much more involved, these tricks can be used as somewhat of a starting point when having a conversation with an insurance professional.

Income Rule

My favorite rule of thumb is the income rule, which states that your insurance coverage should be equal to 7-10 times your gross annual income. (Other professionals may have other ranges, I like 7-10). For example, a person earning a gross annual income of $60,000 should have between $420,000 (7 x $60,000) and $600,000 (10 x $60,000) in life insurance coverage.

Income Plus Expenses

This rule considers your insurance needs to be equal to 5x your gross annual income plus the total of any mortgage, personal debt, final expenses, and special funding needs (college, charities, etc.). For example, assume that you earn a gross annual income of $60,000 and have expenses that total $250,000. Your insurance need would be equal to $550,000 ($60,000 x 5 + $250,000).

Family Needs Approach

The family needs approach asks you to purchase enough life insurance to allow your family to meet its various expenses in the event of your untimely death. Under the family needs approach, you divide your needs into three categories:

• Immediate needs at death (cash needed for funeral and other expenses) 

• Ongoing needs (income needed to maintain your family's lifestyle, such as a mortgage payment) 

• Special funding needs (college funding, bequests to charity and children, etc.) 

Once you determine the total amount of your family's needs, you purchase enough life insurance, also important is taking into consideration the possible accumulating of interest in your life insurance policy over a given time frame. 

These calculations will merely scratch the surface on determining your proper amount of coverage. Several other factors, such as your line of work, size of family, post-mortem desires, among other things, may trump any of the other rules listed above. For this reason, your best bet is to have a conversation with an insurance professional to understand your own unique needs.

Josh Bitel is an Associate Financial Planner at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.

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These policies have exclusions and/or limitations. The cost and availability of life insurance depend on factors such as age, health and the type and amount of insurance purchased. There are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition if a policy is surrendered prematurely, there may be surrender charges and income tax implications. Guarantees are based on the claims paying ability of the insurance company. The hypothetical examples presented are for illustration purposes only. Actual investor results will vary. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

COVID-19 and Your Money: Know These 4 Easy Financial Tips

Contributed by: Sandra Adams, CFP®

The coronavirus pandemic has taken us by storm. The virus has been devastating both financially and psychologically for many across the world. It has changed the way we will likely live our lives forever and forced us to slow down and think about things differently. Here are the top financial lessons that COVID-19 has helped us to see a little clearer...lessons that may be worth holding onto even after the pandemic is behind us.

1. Stick To A Budget

   It is easy for budgeting to take a backseat when times are good. We may find ourselves spending money on unnecessary items because we aren’t paying attention. The pandemic forced many to take a hard look at their expenses due to loss of income and free time. Many cut back on those “extras” they didn’t need, didn’t want, or weren’t using. They found ways to be more frugal without impacting the quality of life. Also a major plus: family time at home didn’t cost anything.

2. Have An Emergency Reserve Fund

   As in any financial crisis or economic slowdown, having emergency reserves can save you if hours are cut or a job is lost. While you can collect unemployment, there is often a gap in it getting paid out. Having emergency reserves, enough to get you through several months’ worth of expenses can be a lifesaver in these situations. The truth is, the majority of the U.S. population does not have this. If you do not have an emergency reserve fund…make this your goal before the next crisis!

3. Update Your Estate Plan

   People of all ages suddenly realized it might not be too soon to make sure their estate planning documents are in order. Durable Powers of Attorney and Wills (and potentially a Trust if applicable) used to put off most younger folks until they started to have families or until they felt like they had accumulated “enough” in assets. The sudden threat of a virus that could take your life at any age suddenly made these documents more important. Even more so with anyone over the age of 18 needs to have their Durable Powers of Attorney as their parents are no longer able to make legal, financial, or medical decisions on their behalf. Many COVID-19 patients were taken to facilities alone and not allowed to have a family member accompany them.

4. Get Life Insurance

   The pandemic caused a surge of folks to wonder if they were sufficiently covered from a life insurance standpoint. Many were younger families who had not yet accumulated sufficient assets to support their spouses and children long-term. While less common, COVID-19 deaths have appeared in the young adult group. If those families did not have sufficient life insurance, their surviving members were left in a devastating financial situation. It’s extremely important to make sure one always has sufficient life insurance coverage until they have the time to accumulate assets to support their families later in life. More young folks need to get life insurance; middle-age clients need it if asset accumulation is behind schedule. 

While COVID-19 has greatly impacted our lives, we can certainly learn from it. Consider implementing these 4 lessons. We are certain to learn more lessons from COVID-19, but this is a good place to start!

Sandra Adams, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® and holds a CeFT™ designation. She specializes in Elder Care Financial Planning and serves as a trusted source for national publications, including The Wall Street Journal, Research Magazine, and Journal of Financial Planning.

Employee Benefits Open Enrollment: 2018 Game Plan

Contributed by: Robert Ingram

Now that the Fall season is upon us and the holidays are right around the corner, it is also the annual benefits open enrollment season for many employers.  I know it can be tempting to quickly flip through the booklet checking the boxes on the forms without too much consideration, especially if things haven’t changed too much in your situation.  You’re certainly not alone.  However, setting aside some extra time to review your options is important for not only understanding the benefits you have and what might be changing, but also for identifying potential gaps in your coverages or underutilized opportunities.

Below are some benefits that, if offered by your employer, you should keep top of mind as you are making your elections.

Retirement plan contributions (401(k)/403(b) )

• Are you contributing up to the maximum employer match? (Take advantage of free money!)

• Are you maximizing the account?  ($18,500 or $24,500 for age 50 and over in 2018)

• Traditional 401(k) vs. Roth 401(k) options? 

Click here for a summary of 2018 retirement plan contribution limits and adjustments

Health insurance plans

• Review and compare your available plan offerings (e.g. PPO vs HMO). Want to explore some of the differences between plan types in more detail? Click here.

• Focus on more than just the premium cost. Think about the deductibles, copays, and the annual out-of-pocket maximums

• Consider your health history and the amount of services you use. For example, are you likely to hit the deductible or maximum out-of-pocket costs each year? The benefit of lower premiums for a high deductible plan may be outweighed by higher overall costs out-of-pocket.  Are you less likely to hit the deductible but you have excess cash saving just in case?  A lower premium, high deductible plan could make sense.

Health Care Flexible Spending Accounts vs. Health Savings Accounts

Flexible Spending Accounts and Health Savings Accounts both allow you to contribute pre-tax funds to an account that you can then withdraw tax-free to pay for qualified out-of-pocket medical expenses.  There are, however, some key differences to remember.

Flexible Spending Account for health care (FSA)

• Maximum employee contribution in 2018 is $2,650

• Generally must spend the balance on eligible expenses by the end of each plan year or forfeit unspent amounts (use-or-lose provision).

• Employers MAY offer more time to use the funds through either a grace period option (you have an extra 2 ½ months to spend the funds) or a carryover option (you can carry over up to $500 of the balance into the following year)

For more information on the FSA click here.

Health Savings Account (HSA)

• Can only be used with a high deductible health insurance plan

• Maximum contribution in 2018 for an individual $ 3,450  ($4,450 for age 55 and over)

• Maximum contribution in 2018 for an family plan $6,900  ($7,900 for age 55 and over)

• All HSA balances carryover (no use-or-lose limitations apply)

Click here for more information about the basics of using an HSA

Dependent Care Flexible Spending Account

• Pre-tax contributions to an account that can be withdrawn tax-free for qualified dependent care expenses within the plan year

• Maximum contribution in 2018 is $5,000 ($2,500 if married filing separately)

• Use-or-lose provision applies 

Life and Disability Insurance

• Employers often provide a basic amount of life insurance coverage at no cost to you (typically 1 x salary). 

• You may have the option to purchase additional group coverage up to certain limits at a low cost.

• Many employers also provide a group disability insurance benefit. This can include a short-term benefit (typically covering up to 90 or 180 days) and/or a long-term benefit (covering a specified number of years or up through a certain age such as 65).

• Disability benefits often cover a base percentage of income such as 50% or 60% of salary at no cost with some plans offering supplemental coverage for an additional premium charge.

• Life and disability insurance benefits can vary widely from employer to employer and in many cases only provide a portion of an employee’s needs.It is important to consult with your advisor on the appropriate amount of coverage for your own situation.

Like most things related to financial planning, your benefit selections are specific for your family’s own unique circumstances; and your choices probably would not make sense for your co-worker or neighbor.  We encourage all clients to have conversations with us as they are reviewing their benefit options during open enrollment, so don’t hesitate to pass along any questions you might have. If we can be a resource for you, please let us know.

Robert Ingram is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.®

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This information has been obtained from sources considered to be reliable, but Raymond James Financial Services, Inc. does not guarantee that the foregoing material is accurate or complete. This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Raymond James Financial Services, Inc. does not provide advice on tax, legal or mortgage issues. These matters should be discussed with the appropriate professional. Life insurance Guarantees are based on the claims paying ability of the insurance company.