15th May 2014

I get many questions regarding life insurance, and while I am happy to advise on the many estate and gift tax consequences related to life insurance, I leave the recommendations of why, how much and why to the life insurance experts.  The information below is provided courtesy of Mr. David Kulawiak.

David is an insurance broker and owner of Our Community Insurance Consultants.  He provides all types of insurance to individuals and small businesses.  David is a specialist in Disability Income Insurance, Long Term Care Insurance, and Property and Casualty Insurance for the Nonprofit sector.  He is also an owner of www.GayInsurance.com serving the LGBTQ Community in the Chicagoland area.

Next month, I will post the second part of David’s entry, which will cover the many types of life insurance policies and how they are sold.

Why should I buy life insurance?


1. Replace income for dependents


2. Pay final expenses


3. Create an inheritance for your heirs



Life insurance benefits can pay estate taxes so that your heirs will not have to liquidate other assets or take a smaller inheritance. Changes in the federal “death” tax rules have lessened the impact of this tax on some people, but some states are offsetting those federal decreases with increases in their state-level “death” taxes.

5. Make significant charitable contributions


6. Create a source of savings


How much life insurance do I need?






Other sources of income

Most families have some sources of post-death income besides life insurance. The most common source is Social Security survivors’ benefits.

Social Security survivors’ benefits can be substantial. For example, for a 35-year-old person who was earning a $36,000 salary at death, maximum Social Security survivors’ monthly income benefits for a spouse and two children under age 18 could be about $2,400 per month, and this amount would increase each year to match inflation. (It drops slightly when the survivors are a spouse and one child under 18, and stops completely when there are no children under 18. Also, the surviving spouse’s benefit would be reduced if he or she earns income over a certain limit.)

Many also have life insurance through an employer plan, and some from another affiliation, such as through an association they belong to or a credit card. If you have a vested pension benefit, it might have a death component. Although these sources might provide a lot of income, they rarely provide enough. And it probably isn’t wise to count on death benefits that are connected with a particular job, since you might die after switching to a different job, or while you are unemployed.

A multiple of salary?



The “multiple of salary” approach also ignores other sources of income, such as those mentioned previously.

A simple example

Suppose a surviving spouse didn’t work and had two children, ages 4 and 1, in her care. Suppose her deceased husband earned $36,000 at death and was covered by Social Security but had no other death benefits or life insurance. Assume the surviving spouse is 36.

Assume that the deceased spent $6,000 from income on his own living expenses and the cost of working. Assume, for simplicity, that the deceased performed services for the family (such as property maintenance, income tax and other financial management, and occasional child care) for which the survivors will need to pay $6,000 per year. Assume that the survivors will have to buy health insurance to replace the coverage the deceased had at work, and that this will cost $12,000 per year.

Taken together, the survivors will need to replace the equivalent of $48,000 of income, adjusted each year for an assumed 4 percent inflation.

Thanks to Social Security, the survivors would need life insurance to replace only about $1,700 per month of lost wage income (adjusted for inflation) for 14 years until the older child reaches 18; Social Security would provide the rest. The survivors would need life insurance to replace about $2,100 per month (adjusted for inflation) for three more years when the non-working surviving spouse has only one child under 18 in her care.

The life insurance amount needed today to provide the $1,700 and $2,100 monthly amounts is roughly $360,000. Adding $15,000 for funeral and other final expenses brings the minimum life insurance needed for the example to $375,000.

What’s left out?

The example leaves out some potentially significant unmet financial needs, such as



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