My earlier post, “Do I Need Insurance?” discussed the one example of the person for whom life insurance may not be needed. For the rest of us, married, with children, we may need insurance well beyond the time the kids leave for school.
Let’s first take a step back and start with the initial need. You get married, both of you are working. Now’s the time to buy that first term policy for both of you. An amount to cover approximately 10 years’ salary should be close to the right number. If either spouse dies young, it would ease the burden by being able to pay off the mortgage and have college covered for the kids.
Let’s now move ahead 20 years. Kids are out of the house, maybe finishing up school or completely off on their own. You may still need insurance. If you’ve saved and invested well, between the 401(k), IRA, and the value of you home, you may have well over $2 million dollars in your estate. While the estate tax for 2007-8 doesn’t apply until your assets exceed $2 million (and in 2009, $3.5 million), unless congress changes the law, the estate tax exemption will drop back to $1 million in 2011, after a brief repeal for one year only. Also, while life insurance is tax free to the recipient, if you own your own policy, as most people do, the proceeds are considered part of your estate. You read that right. If you die with $1 million in 401(k), IRA, etc. and have a $500K policy, after 2011, $500K is subject to estate taxes. Of course you may leave an unlimited sum to your spouse, but that only makes her estate larger for when she passes as well. Early planning can help reduce or eliminate what may be a very large tax bill. Death and taxes, both unavoidable, but estate taxes can be reduced or eliminated. I’ll revisit this topic in a feature article on my main site in an upcoming monthly feature.