My husband and I both work; our income split is about 60/40, he being the higher paid.
We will both turn 50 within the next year.
No children living at home.
No substantial debt:
Car loan: $185 monthly
Student loan: $102 monthly
Mortgage: $2,000 monthly
No other debt. We never carry a credit card balance.
We have about 3 months worth of savings in the bank.
Should I base our life insurance on how much we make, how much we have in debt or both? We are living paycheck to paycheck, and if either one of us were to die suddenly, the other would only have a few months to sell the house before we could no longer make the payments. In this market, I don’t think that’s realistic.
I was thinking that we would need enough to pay for a funeral, pay off the smaller two loans, and still have enough to live on for at least a year if the house doesn’t sell. Does that sound right? Or should we not worry about paying off the loans…just calculate enough to replace the other’s income for XX many months? If so, how many months should we plan for?
Finally, at what rate is life insurance taxed? Is it added to your income and then taxed at the rate for your total income for the year? or is there a flat rate tax? (I think I know the answer to this one, but I want to make sure).
Tags: Credit Card Balance, Insurance, Living At Home, Living Paycheck To Paycheck, Mortgage
You’re right about having a big enough policy to pay off all your loans and funeral, you should also consider having one to pay off your mortgage. You can find life insurance which actually decreases the payout amount as you get older. This is convenient for things like mortgages (which decrease as you pay them off), and the fact that as you age your children are growing older, and becoming more independent.
Having enough to live on for a year seems a tad low, but it all depends on your circumstances. You should really consider a policy which will replace the person who dies. By replace I mean potentially provide enough to cover the income for the rest of that person’s expected working life.
Depending on your health status, life insurance is NOT that expensive. I just did a quick check on myself (24 year old male, nonsmoker) for 1 million dollars, and it comes out to ~80/month.
You need to cover all your liabilities, final expenses, mortgage payment fund, emegency fund, and provide an income to keep the suviving spouse in his/her own world financially.
Life insurance proceeds are not taxed as ordinary income. They would only be taxed if the estate at death was $3,000,000 for 2009. Anything over that amount would be taxed at 45%. The Federal Death Tax is eliminated for 2010, but it will be reinstated in 2011, with the taxable estate being over $1,000,000. Any amount over that would be taxed at 55%. (This is the way it stands as of now. The Obama administration may possibly change it)
My recommendation is to call a LOCAL agent, and have him/her do a free Financial Need Analysis (FNA, or other Total Need Program, to help you determine in your own mind the amount, and type of life insurance you need to reach the goals you have set. You may start with the agent who has your home and auto coverage.
The FNA will also help you determine if you need Disability Income Protection, to provide an income should you become injured or ill and can’t work. It will also help you determine if you need a tax shelter, such as an Individual Retirement Account (IRA).
According to statistics, disability is a greater risk than death prior to age 65.
You have a lot of issues to address and did not give enough information to give a specific answer.
I suggest that you meet with a financial planner and/or an insurance agent (or more than one of each) to discuss your particular situation.
You did not give the total amount of debt that you have. You owe $185 per month on a car loan but what is the total debt? $10,000? $30,000? Do you want to keep the car if one of you dies?
Same with the mortgage. How much is the loan balance? $100,000? $200,000? Do you want to sell the house if one of you dies? Where would the survivor live once the house sells? Kids? Apartment? Smaller house? How quickly are homes in your city that are close to the same value selling? 4 months? 12 months? longer?
What if one of you becomes too ill to work for a long time before passing away? The two of you will be down to one paycheck at that point. Will you be able to pay your bills? If not, you will need disability insurance too.
How long will you want to grieve after your spouse’s death? 1 month? 6 months? What about your spouse?
The death benefits of a life insurance policy that you own are NOT taxed. If you have a policy through work, some of those death benefits will be taxed. Talk to a CPA or the financial planner.
Go meet with a professional.
Good Luck
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