I tell my planning clients to ask themselves these questions: If you were to die suddenly tomorrow, how would your family face its income needs, retirement needs and college or other goals. And would your spouse, if you have one, stop working or would you need additional in home help? What extra or reduced expenses would result? These needs and costs can be roughly estimated and totaled. From that total, subtract your current net financial resources (savings, current life insurance, estimated pensions, etc) to see how much more life insurance you might need. Every year that passes, this net number should decrease (reduced needs and increased savings). If you are near retirement, have savings and the kids are finished their education/off on their own, then you may no longer need life insurance (but please see your advisor before canceling any policies you currently have). There are, however, situations that call for permanent life insurance (two examples are a special needs trust or liquidity to pay estate taxes).

Life insurance can be used as a tool for a variety of financial planning purposes. The two most obvious, of course, are to provide for the needs of those who depend upon you and to pay for your final expenses when you die. Life insurance is also a powerful tool for estate planning purposes. Certain portions of the federal estate tax law have been in flux for years and the only thing we know for certain is that they will continue to change in the coming years. Life insurance is a tool that your CFP and estate planning attorney might use to mitigate some of your tax liabilities. Whether or not it makes sense to terminate your life insurance coverage will be dependent onnumerous factors. Consult with your CFP and insurance agent to determine what is best for your particular situation.

If there will be an economic loss when you die, chances are your family needs life insurance on you. Life insurance will provide cash to your family to mediate the economic loss. The death benefit replaces your lost income and can help your family meet many important financial needs such as funeral costs, daily living expenses and college funding for children. As you get older, generally your debts become less and hopefully you have saved for your children’s education and your retirement. If this is the case than your need for life insurance may be less than it was when you took the policy. As you get older however, there are new reasons that life insurance may be needed. If your estate will be subject to estate taxes, many will choose to use life insurance to fund the taxes that will be owed. One of the big advantages of life insurance is that it provides an income-tax free pool of funds that can be used for many purposes. I would advise you to sit down with a financial planner and determine if you still have a need for your life insurance or not. If you no longer have a need for the insurance than you can use those extra funds to help your cash flow situation. Just be careful to never cancel a policy until you are absolutely sure that you no longer need it!