Individual Uses for Life Insurance
Needs Approach
MR. WATSON: The needs approach.
MR. WATSON: We're going to
- add up what the client needs,
- subtract what they have (Social Security, the deceased's pension plan, savings, 401k, etc.) and
- the balance is how much they need in life insurance.
Total amount needed. We're going to find out how much the surviving spouse will need. We're going to come up with a total need, let's say $750,000. We are going to subtract how much they already have. Let's say they have $250,000 from 401(k)s, savings, insurance. The balance, $500,000, is what's needed should the breadwinner die.
MR. WATSON: That's what must be on hand should he die. That's the amount of insurance that's necessary. Does that make sense? It's called the needs approach. You add up everything she needs, total dollar value. We subtract what they already have. The balance will tell us how much insurance is needed in the shortfall. Does that make sense?
STUDENTS: Um-hmm.
MR. WATSON: All you are doing is asking questions. Below is a snapshot, eight things.
- Final expense fund
- The Housing fund.
- College education fund
- Monthly income. There's two parts to the monthly income:
- Emergency fund
- Disability fund
- Retirement fund
- Coverdell Education Savings Accounts
MR. WATSON: Let's keep going.
- The Final Expense Fund - funeral or burial.
- The Housing fund - how important is it to pay off the house when a guy dies? Then we need the balance of the mortgage.
- College education fund - add on another hundred thousand.
- Monthly income. There's two parts to the monthly income:
- The dependency period . The dependency period refers to that period of time when the breadwinner dies and there's young children living at home. The greatest need for income is when a guy dies and there are children at home. You have to provide an income.
- Blackout period . The blackout period begins when the youngest child reaches 16, and it lasts until the surviving spouse turns at least age - 60
MR. WATSON: That's the blackout period. No more payments from S.S. We will need to provide him/her some income.
- Emergency fund - I have been in the grave five years. My wife, Elizabeth, needs $5,000 to repair the roof. Where is she going to get it? Emergency fund, money we have set aside for emergency expenses.
- Disability fund - The same needs that arise at death, arise when a guy becomes disabled except what fund? The final expense fund. If a guy becomes disabled, are we burying him?
STUDENTS: No.
MR. WATSON: Very Important. You want me to say it again?
STUDENTS: Yes.
MR. WATSON: The same needs that arise at death also arise when a guy becomes disabled except for the final expense fund, because we're not burying the disabled guy.
- Retirement fund - In the happy ending version of this where neither spouse dies, we will still need to provide for retirement. Life insurance protects against dying too soon, annuities protect against living too long.
- Coverdell Education Savings Accounts - These are tax favored education savings accounts. You deposit after tax dollars into an account for a named child before she turns 18. The money grows and is not taxed when taken out for her education. There are income limits of about $190,000 for married couples filing jointly. The max you can put in is $2000 per child, per year. If the kid does not use the money for school or if there is still money in the account when she turns 30, you can roll the money into another account for another child. If not used for these purposes, guess what? A 10% penalty on the amount taken out as well adding it to current income for the year. If more than $2000 is deposited in a year there is a 6% excise tax.
MR. WATSON: The needs approach. You add up what they want, subtract what they already have. The balance is what they will need.
Individual uses of life insurance
- Final expense fund
- Housing fund
- Education fund
- Monthly income
- dependency period
- blackout period
- Emergency fund
- Disability income fund
- Retirement fund
- Coverdell Education Savings Accounts