Quite frequently when I’m working with clients, I am asked the question - how much life insurance do I need?

Like any good lawyer, my answer is “it depends.” There’s no set answer.

Personally, I have $1,500,000 on my life. And, by the way, it’s not payable to my kids or my ex if something happens to me. My life insurance is payable to a trust for the benefit of my kids that they wouldn’t get control over until they are mature. But, the money never comes out of the Trust. It stays in protected from potential lawsuits and divorces they may later be involved in. You should do this too.

Ok, so what does the “how much” decision depend on?

Well, it depends on how much you’d want your loved ones to have after you are gone and what their needs would be.

You can use the nifty calculator here, which will help you calculate how much your loved ones would need after you are gone.

I hear a lot of people say they want enough insurance to pay off their home if their spouse died, but that’s not necessarily the best use of insurance money. You absolutely do want to make sure there would be enough money coming in to support the mortgage payments, property taxes, and maintenance of the house, but paying off the house isn’t always the best idea.

A house payment has tax advantages and a paid off house is a lot of money just sitting there not earning any return on your investment. In a low interest rate environment, it’s better to have the mortgage and invest the money in income producing assets.

I strongly recommend that you don’t make any of these sorts of decisions without the guidance of a trusted family advisor. And, I personally believe that the best advisor for your family is a Personal Family Lawyer who is totally on your side and will help you to make the best decisions throughout life and then be there for your family when you can’t be.

I get massively ticked off when I meet with prospects for a Family Wealth Planning Session and see on their Family Wealth Inventory and Assessment they’ve been sold life insurance they don’t need.

Life insurance is critically important for families, no doubt.

But, it’s important you get the right type of life insurance for your family; otherwise, you are pouring your hard earned money into the pockets of your life insurance agent.

That makes me angry as a hornet!

Here’s the real deal, objective, hardcore information you need before you make a life insurance buying decision for your family.

There are two main types of life insurance: term insurance and permanent insurance.

Within the permanent insurance category, they are many subsets, including Variable, Universal, Whole Life, and a few others that are a combination of those I just listed. You can find the definitions of each of these here, if you really care.

Truly though, most of you shouldn’t really care. Because very few of you reading this need permanent insurance.

You almost certainly need term insurance and if you don’t have it, you should get it now. The younger the better because it gets more expensive as you age. I got a $1,000,000 policy at the age of 28 that cost me about $440/year.  That same policy just three years later would have cost me double that.

Term insurance provides death benefit in a “face amount” (I have a total $1,500,000 of death benefit on my life for my kids) so long as you pay your premiums each year.

The premium payments will stay level for the term of the insurance, which could be 10, 20 or 30 years, depending on your contract. After that, if you wanted to continue the insurance, it would likely be cost-prohibitive for you to do so (unless you get a type of term insurance called convertible-term, which is generally more expensive, but allows you to convert it to  permanent policy during the term agreement).  With a term policy, there is no cash value build up - so, if you pay $1000 in a year and you don’t die in that year, that’s it, the $1,000 is gone.

Permanent insurance, in contrast, is a lot more expensive. For example, that same million dollar policy that costs me $440/year could cost $440/month if it was for a permanent policy.

The extra premium goes into an investment account that builds up cash value, which sounds really nice, BUT has some real downsides, including you have no control over this investment account and huge amounts of it are eaten up by commissions to your insurance agent in the first year, so you are starting your investment in the hole big time and have a lot of ground to make up before it will even come close to comparing to taking that money and putting it in a traditional investment account.

Commissions are worth it if you NEED permanent insurance, but are a waste of your hard-earned cash, if you don’t.  There is only one condition under which permanent insurance makes sense for your family - if you absolutely MUST have insurance at the time of your death.

There are only 2 situations in which you absolutely MUST have life insurance at the time of your death. They are:

1. Your family will need the insurance to pay estate taxes at your death. You are only at risk of estate taxes (today) if you have more than $2,000,000 in assets. If you have less, don’t worry about it yet.

2. Someone will be dependent on you at the time of your death and you may not have enough in retirement accounts, savings or other assets to provide for that person at the time of your death.

Let’s talk a little bit more about the 2nd situation and look at some examples because if you have a potential estate tax issue, you probably know it. But, you may be uncertain as to whether you need permanent insurance to provide for dependents.

If you are married and both partners are breadwinners and you have healthy, minor children - you don’t need permanent insurance. Term insurance that lasts for 10, 20 or even 30 years (depending on the age of your minor children and your desire to provide for them into their 20s) is sufficient. If you or your partner died after the expiration of your term, you kids could provide for themselves and your partner could continue working.

If you are married and both partners are breadwinners and you have a special needs child - you might need permanent insurance, but you might not. If you have a special needs child who will need financial care forever and you will not have enough money put away in a Special Needs Trust through your own savings or gifts from other family members to provide for that care, you may want to consider a permanent insurance policy to fund that Trust for your child.

If you are married and one of you is a stay at home spouse and is not likely to ever enter the workforce - you may want to consider permanent insurance to provide for the lifetime financial needs of the non-employed spouse, if you won’t have enough in savings or retirement to provide for the lifetime needs of the non-earning spouse if the earner spouse dies prematurely, but after the term insurance would expire.

To make this one a little more concrete, let’s look at an all too common example in which breadwinner husband dies in his late 50s or early 60s after his term insurance has expired but before he’s got enough in savings or retirement to support stay at home wife who has been out of the workforce raising their kids for the past 30 years and is now left with not enough resources to support her for the next 30 years and no real prospects for supporting herself financially.

Personally, I’d rather see this scenario avoided by ensuring that each spouse in a marriage always has the capacity to earn a living by working together to build a business that would support either spouse with passive income later in life, but if that’s not realistic for your family, permanent insurance may be a necessary solution.

Bottom line?

Term insurance unless you know you are going to need insurance when you die to pay estate taxes (in which case the insurance should be owned in an Irrevocable Life Insurance Trust) or some type of permanent insurance if you want to guarantee to have some coverage in place for a non wage-earner spouse or special needs child no matter what age you are when you die.

Next week we’ll talk about how to decide how much life insurance is right for your family.

A few days ago, I got an email from my cousin asking me whether I wanted to hear about how one of my family members stole $300,000 from me and my sister.

Let me start at the beginning …

About a month ago, my grandmother (Nana) died in Florida. Nana was my dad’s mom and I didn’t have much of a relationship with her because of an estrangement between her and my father before his death.

My father had a sister and a brother, both of whom were close to their mother, but I wasn’t entirely surprised there wasn’t any plans for a memorial service. And, truthfully, I was a little relieved because I’d have felt obligated to fly to Florida even though I haven’t been particularly close with my dad’s family … she WAS my grandmother.

Although I didn’t expect an inheritance from Nana, I did have a fleeting thought about a Will and whether Nana had included my dad.

But, it was fleeting. I didn’t think much about it.

Until …. two weeks ago. When I got the email from my cousin about the stolen 300,000 dollars. (It was interesting to note that before I saw my cousin’s email, I literally didn’t think twice about an inheritance, but once he suggested I “should have” received something, my mind couldn’t stop thinking about it and wanted to find any way possible that I would be entitled to that money, regardless of whether I was or wasn’t. Fortunately, I haven’t let my mind suck me into the game too much. I wasn’t expecting anything, though it’d sure be nice!)

Anyway, it turns out there WAS a Will prepared by Nana in 1993, leaving a specific piece of property to be divided evenly between my dad and his brother.

My uncle expected to receive this property, which would have been split with me and my sister, as my dad’s heirs, thus the 300,000 my cousin referenced in his email.

Despite the Will and my uncle’s expectation, nana had apparently quit claimed the property to my aunt before her death, nullifying the gift in the Will. And, my aunt sold the property without telling my nana or anyone else in the family!

As you might imagine, my uncle and his family are confused and can’t understand what happened or why.

Upon my uncle’s inquiry to my aunt and her family, they got very defensive, would provide no information, insisted everything had been done legally and if my uncle had a problem with it, he could get a lawyer.

The trouble is, no one knows what my Nana really wanted.  Up until she died, she’d been telling my uncle he’d be taken care of; he’s totally confused and doesn’t know where to turn other than to place blame on his sister who ended up with all the assets.

It’s possible my Nana was afraid to tell my uncle that she was giving everything to my aunt.  It’s possible Nana didn’t know what she was doing too.  The truth will never be completely known now.  It’s too late.

My nana’s failure to tell everyone what she wanted before her death has now caused a massive rift in the family that likely will never be healed.

Don’t do this to your family.

Clearly communicate your wishes before it’s too late. Make sure all your children know in advance what you want to happen if you become incapacitated or after you are gone. Leave your family with the gift of a Personal Family Lawyer who will be there for your family after you are gone and make sure everyone knows exactly what you wanted.

There will be no fighting, no confusion, no wondering why.  Your loved ones deserve that.