By Mike Levine
What is life insurance?
“Life insurance is just a time-yellowed piece of paper with columns of figures and legal phrases until it is baptized with the widow's tears. Then it is a modern miracle, an Aladdin’s lamp. It is food, clothing, shelter, education, peace of mind, comfort, and undying love and affection. It is the most sincere love letter ever written.” –Stuart Kuen
Life insurance is an explosion of dollars providing your loved ones TAX-FREE cash when it's needed most! It can be used to replace income after one’s death and/or to pay off debts. Other uses include buy-sell agreements between business owners, saving for retirement, estate planning and charitable giving.
Let's cover the most common uses of life insurance. The first is to replace one's income. Many experts recommend 10 times your earnings as a rule of thumb. If you make a $100,000 you should buy $1M in coverage. I personally use a different method. Calculate what it takes your family to live comfortably on an annual basis and divide by 0.04. For example, it takes $5,000 per month or $60,000 per year, divide $60,000 by 0.04 to get $1.5 million. Thus, upon your death, your beneficiary would receive $1,500,000. A safe withdrawal rate in my opinion is 5% which would produce $75,000 per year taxable income without touching the principle.
Another great use of life insurance is charitable giving. You can gift a policy no longer needed or purchase a new one with the intention of leaving the charity an explosion of dollars upon your death. Insurance can also be used as part of a Charitable Remainder or Lead Trust. Ask your financial advisor for more details.
There are basically two types of life insurance: term and permanent insurance. Term insurance is usually used if the need is for a limited time, for example, to get the kids through college or until you reach retirement. Permanent insurance comes in different flavors such as whole life, universal life, variable life, etc. This type of coverage lasts your entire life and thus is more expensive. Other advantages of permanent insurance include building cash value on a tax-deferred basis and the use of that cash in retirement or in case of an emergency. I will say in my 34 years in business, no beneficiary has asked me what kind of insurance one had, only how much.
Here are some examples of monthly premiums for a man and woman in excellent health for a $1,000,000 policy.
Term Permanent Term Permanent
10 yr 20 yr 30 yr 10 yr 20 yr 30 yr
Age 35 $21 $34 $64 $397 $19 $29 $51 $350
Age 45 $45 $87 $150 $610 $38 $68 $115 $525
Age 55 $123 $221 $456 $997 $91 $158 $310 $886
So, here’s a question – If you knew you were going to die tomorrow, how much life insurance for your loved ones would you buy today?
Mike Levine is a member of the Jewish Federation professional advisory Council. For more information about this year‘s Professional advisory Council seminars please contact Shannon Small, Assistant FRD Director and Foundation Director at firstname.lastname@example.org.