How Much Life Insurance Should I Buy?

Adam Stoeckler, CFP® |

Normally, the discussion surrounding life insurance centers on the income needs of the widow or widower in the case of a spouse’s premature death. An estate can be generated, if there is not already a sizable estate, through life insurance proceeds, from which cash will be available to pay for final burial and estate expenses, pay off household debts, and to maintain the current household expenses for the survivors. In addition, life insurance proceeds can be used to fund lifetime goals including retirement, college education, building a new home, or starting your own business.

What can be left out of the life insurance planning conversation, however, are the other sources of funds that are available if needed, that can dramatically reduce the amount of life insurance that you need to take care of the survivors. One source of income are pre-existing retirement accounts, if owned by the survivor, can be accessed without penalty if you are age 59 ½, or if it’s the deceased retirement plan, can be accessed penalty free if the funds are used for a hardship, in this case death of the account owner. 

Another, often overlooked, resource is Social Security survivor benefits. If you are a widow or widower caring for minor children under age 16, you and your children may be eligible to receive a one-time death benefit of $255 and monthly survivor income benefits. If you are a widow or widower age 60, you may be eligible to begin collecting Social Security survivor monthly benefits. Additionally, if you are divorced and were married for more than 10 years, and your ex-spouse predeceases you, you may be eligible to receive survivor benefits off their work record. These Social Security benefits are subject to annual earnings rules and caps on household benefits, but where survivor needs and eligible events meet, Social Security can provide a foundation of income from which life insurance proceeds and investment assets can be added on to supplement further needs.

Survivor benefit estimates can be found on your Social Security statements, which can be generated and viewed online at any time. Since each family’s dynamic is unique it is suggested that you consult with a financial planner to determine how much you should plan to have available in pre-existing monetary resources if your spouse dies, and then determine how much life insurance may be needed beyond that. Appropriate planning should provide you with a road map for determining life insurance needs beyond the 10-12 x annual income rule of thumb, which can save your household valuable insurance premium dollars. 

If you would like to continue this conversation, please contact our office.