Ask a Lawyer : Chapter 4 - Insurance

How Much Insurance?

Q. Should life insurance be part of most estate plans? If so, are there rules of thumb on how much to purchase?

A. Insurance should be part of your estate plan anytime that you anticipate that there will be a need for cash following your death. Usually, insurance is purchased to provide for the support of family members after your death, but it may also be used to pay off debts and to temporarily cover the expenses of a business until it can be sold or refinanced.

When the support of family members is your primary goal, the rule of thumb is that you should purchase insurance that is six to seven times the annual income that your family will lose as a result of your death. This amount can be reduced if you have other investments or property that can support your family after you are gone, but it may need to be increased if your family is accustomed to a high standard of living, or if you want to ensure that your children have educational opportunities at the college and postgraduate levels.

What Kind of Insurance?

Q. There are lots of insurance “products” out there. What are the criteria for choosing one type of life insurance over another?

A. There is no single “best” insurance product. Instead, you need to look at your needs and the amount of money that you have available. Term insurance is the cheapest form of insurance and may be appropriate for someone with limited funds and only a temporary need for insurance coverage. Permanent or “whole life” insurance, on the other hand, is considerably more expensive, but has the advantage of a level premium payment and can be used as a tax-deferred savings plan. Make sure that you are not just being sold a “product,” but that you are buying insurance that is appropriate for you.

Answer by Harold Pskowski, BNA Tax Management, Washington DC