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.
JOE
If you have any dependents, or debts that someone has cosigned on your behalf, you should consider a term policy. I believe that “no dependents, no need for life insurance” is valid for most people. One exception that may apply (I’m not fully convinced) is when the individual is likely to have the need for insurance at some point in the future, e.g. they have a strong chance of getting married and wanting children. It’s easier to buy insurance at a younger age and there’s always the chance that one becomes uninsurable just at the point when the need arises. I believe that there’s a much greater need for disability insurance. The numbers show far more people become disabled before retirement age than dying. Something to consider.
JOE
For most of us, that’s not going to happen. Reading “Fooled by Randomness” taught me about survivorship bias and in the case of those late night TV ads pushing everything from day trading to get rich quick real estate schemes, that lesson rings true. Can you make money in real estate? Of course you can. And for every 1000 people who take whatever course is being sold, there are certainly those few who managed to turn a profit and maybe even begin a new career. But most of the money being made is by those selling those courses. For the rest of us, it’s a matter of slow, steady, savings for retirement and avoiding the 10 reasons you are not rich. Sorry, there’s no magic secret I can offer to riches, just some common sense, and patience.
JOE
I’d like to offer words from Laurence D. Fitzmaurice President and CEO of the New England Shelter for Homeless Veterans:
“Again we have the opportunity to reflect on things that we can be thankful for even if we have experienced otherwise troubling circumstances.
Veterans’ Day also gives us a time to pause and be thankful for all veterans past, present and future, in war and in peace, those who are part of the fabric of keeping secure what we sometimes take for granted.”
I’ve referred to charitable giving in some of my posts, and this is one charity that’s always been at the top of my list. If you are looking to add a new charity to your giving list, or a worthwhile charity as a new donor, please consider this shelter for homeless vets.
JOE
A homeowner owes $200,000 and for whatever reason, finds he can no longer pay the mortgage. The bank accepts the deed in lieu of foreclosure and sells the house for $150,000. The homeowner breathes a sigh of relief to be out, but in January receives a 1099. He now has taxable income for the amount of money he cannot afford to pay the bank. Surely the tax on $50,000 is a better deal than the whole $50,000, but for the guy who couldn’t come up with the $1500 mortgage payment each month, where is he supposed to find the $12,500 (I’m assuming a 25% tax bracket) to pay the tax due?
Congress is considering legislation that would change the law that taxes the loan amount which goes unpaid, but that’s not likely to happen overnight.
Enjoy the weekend,
JOE