In these uncertain times, it’s natural to ask yourself, if something were to happen to me, would my family have enough to meet day-to-day needs and achieve their longer-term goals? Now more than ever, it’s an important question to consider.
Your financial advisor, tax advisor, and attorney can help review your current financial situation and develop a strategy to help protect your family’s financial needs.
The steps below are intended as a starting point for discussion and planning for your life insurance needs.
When to Update Your Plan
As a general rule, we recommend revisiting your life insurance needs as your financial situation changes and at certain key life events, such as:
- Growing your family
- Establishing a fund for education costs
- Changes in employment
- Changes in marital status
- Changes in mortgage expenses
Step One: Determine Immediate Expenses
In the event of your death, your family will have certain immediate expenses to cover, such as funeral costs, as well as ongoing needs, such as mortgage payments.
To give you a rough idea, the national median cost of a funeral in 2021 was more than $7,848,1 which does not include probate fees or other burial costs.
If your family will continue to live in your home, you will need to figure in the remaining balance of your mortgage, insurance, taxes, and maintenance. Even if you think they will eventually move, think about the cost of rent or a new mortgage payment. Remember, selling a home may trigger capital gains taxes. Consult your tax advisor regarding your circumstances.
Think of your life insurance in terms of the income it can provide.end call out
Next, take a look at your credit card debt, car loans, education loans, and other outstanding liabilities. Think about unexpected emergency costs like income lost due to work absence, medical expenses, or home repair.
If your children are in college, this is another item to set aside for immediate expenses. You’ll also want to figure in the cost of future college education for younger children.
According to College Board research, four years of tuition, books, room, and board is right around $97,960, on average, for a public college and $218,680 for a private school.2
Step Two: Account for lost income
Think of your life insurance in terms of the income it can provide. For instance, you may want to consider replacing the income you would have been earning for your family. Take a look at how many years your family will need support and the average rate of return on investments.
Step Three: Analyze other income sources
We suggest revisiting your life insurance needs as your financial situation changes.end call out
If your retirement savings can be liquidated, it might provide cash flow for your family. These can include an IRA, 401(k), annuities, and other retirement accounts. If your retirement plan allows, your survivor may receive a single payment of the entire balance (fully taxable to the survivor). The surviving spouse might also have the opportunity to roll over the entire balance into a traditional IRA. Keep in mind there may be additional taxes due when accessing retirement savings.
For some families, Social Security may provide temporary benefits to children younger than 18 or children with disabilities. Determine if members of your family would be eligible for such benefits and for how long. The length and the amount of benefits might be so small it is not worth including in your calculations.
Take a close look at available assets your family could choose to liquidate, including any stocks, bonds, savings accounts, inheritance, commodities, and rental property.
If your family chooses to keep the rental property, all related expenses will need to be calculated just as with a primary residence, including mortgage payments, insurance, taxes, and maintenance. If they sell, there will be selling expenses and taxes due upon sale.
- Take some time to determine your family’s needs in the steps above.
- Check your life insurance policy to see how it aligns with your estimated expenses.
- Reach out to your financial advisor, tax advisor, and your attorney to discuss a strategy to address your family’s financial goals.
1 2021 National Funeral Directors Association, Statistics for National Median Cost of a Funeral with Viewing and Burial (accessed 8/08/23).
2 Approximate total costs for four years for in-state tuition, fees, books, and room and board (transportation and miscellaneous expenses not included). Base is 2022 – 2023 school year. Costs for all future years projected by Wells Fargo and Company and its Affiliates in November 2022 assuming a 2.5% national average increase per year for public and 3.0% for private (based on a 10-year historical average). Source: Trends in College Pricing and Student Aid. collegeboard.org
Insurance products are offered through non-bank insurance agency affiliates of Wells Fargo & Company and are underwritten by unaffiliated insurance companies.
Wells Fargo Advisors is not a legal or tax advisor. Any discussion of taxes represents general information and is not intended to be, nor should it be construed to be, legal or tax advice. Tax laws or regulations are subject to change at any time and can have a substantial impact on an actual client situation.