Everyone makes mistakes. Heck, I make them all the time!
I've been doing a number of financial plans lately. Within each financial plan I review life insurance needs as a part of the risk management section.
Lately I've found many very astute investors that have just too much life insurance. This can be a mistake. It's important to have the right amount.
They've bought these policies in some cases, years ago, when their situation was very different.
Why is having too much life insurance a problem?
1. It's a budget buster. This stuff can be expensive. I reviewed a client once that was spending almost a third of his income on various insurances. Another client had over 17 policies! It took me forever to input that info into his financial plan!! Determine the right amount of life insurance through a goal-based financial plan. That way you know exactly what you need, and then you can buy what you can afford.
2. Adds to your estate tax liability. Keep in mind life insurance is income tax-free. It's not estate tax-free. So if you own that massive policy or you have 5, 6 or even 17 smaller ones, that adds up. The trick here is if you have any incidence of ownership it counts as part of your estate for estate tax purposes. Final hint... let a trust own your life insurance.
3. It's money that can be used for other goals. I've encountered plenty of clients that have been paying hundreds of dollars each month for life insurance they don't need. They could divert that money for saving for retirement, purchasing long-term care insurance instead or even having some discretionary funds for entertainment! That sound nice, right?
So how much is the right amount?
That depends on the individual and the goals. However, once you've accumulated a large amount of investments, then traditional term insurance may no longer be necessary, or it can be reduced significantly. The only way to know... create your financial plan.
I'm not here to pass judgement. Like I said, I've made my share of financial mistakes too. But without the financial plan you probably will be making those mistakes again and again.
I'd love to help you with your insurance and financial planning, so contact me for a free review. Or you can subscribe and read my financial ramblings every Friday.
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