Life Insurance Reality Check

For many, the purpose of estate planning is to dispose of one’s property upon death in a manner that ensures that one’s loved ones will be taken care of. While some accomplish this by devising their property in a will to their intended beneficiaries, others take advantage of what are often called “will substitutes.” For example, life insurance policies are one type of will substitute. Unlike wills, life insurance policies do not go to policy beneficiaries via probate, which makes insurance policies potentially useful estate planning mechanisms for tax avoidance purposes. Despite this obvious plus, children of the baby boomers-deemed “generation X” in Jeff Reeves’ article, “Survey: Gen X seriously short on life insurance”-have on the whole not been taking advantage of life insurance as an investment and estate planning vehicle. According to the article, a recent survey by New York Life revealed that on average Americans born between 1965 and 1976 require life insurance in an amount nearly $449,000.00 greater than that which they have opted for. Furthermore, almost 20% of “Generation X” does not have any life insurance coverage, a figure that is up from the 5% reported in 2008.

One thousand American’s aged 37 to 48 were surveyed for the purpose of determining their current life insurance coverage and their actual life insurance need. The survey revealed a median current coverage of $260,000.00 compared to an actual need of $708,996.00. The difference between the coverage actually being sought and that which is needed- $448,996.00-is 24% greater than the $363,000.00 difference reported in 2008. It is no coincidence that the gap began to increase shortly after the economic downturn of 2008. Ever since that time, Americans have had far less monetary flexibility, and, as a result, they have had to cut many things out of their budget, and apparently life insurance coverage is often one of the first things foregone when money is tight. Unfortunately, while Americans have no choice but to cut back on superfluous expenses, life insurance should not be hastily placed on the list of expendable expenses.

Aside from the common American reluctance to budget, Americans are also not keen to focus on their own mortality, nor on the underwater mortgages and credit card debt that often survives them. Cutting back on life insurance can be a big risk, as well as a big missed opportunity. According to Larry Rosenthal, the president of Rosenthal Wealth Management Group, the right life insurance coverage would easily exceed $1 million for many middle-class American families. A major consideration when dealing with life insurance, which is not a pleasant one to contemplate, is the loss in income that results from the death of a family provider. Mr. Rosenthal advises that, “[a]s a rule of thumb, at a minimum you need to have five to 10 times your income in life insurance. . . .” However, that being said, Americans who feel they are unable to invest in such high-though arguably necessary-life insurance policies should not be discouraged from investing in any life insurance at all. That is, it is better to have some amount of life insurance coverage than none at all, even if the amount you may feel you can afford is below the amount recommended by Mr. Rosenthal.

If you or someone you know wishes to create or modify an estate plan that maximizes the use of “will substitutes,” such as life insurance policies, please do not hesitate to contact the experienced estate planning attorneys at Chepenik Trushin LLP, who are ready, willing, and able to assist you in creating your ideal estate plan.