How Much Life Insurance Is Enough?

Your life insurance needs often depend on a number of factors, including whether you are married, the size of your family, the nature of your financial obligations, your career stage, and your goals.

There are a number of approaches you can use to figure out how much insurance you should have. One method, called the "family needs approach," focuses on the amount of life insurance it would take to allow your family to meet its various financial obligations and expenses in the event of your death.

Family needs approach

With the family needs approach, you divide your family's financial needs into three main categories:

• Immediate needs at death, such as cash needed for estate taxes and settlement costs, credit card and other debts including mortgages (unless you choose to include mortgage payments as part of ongoing family needs), an emergency fund for unexpected costs, and college education expenses.
• Ongoing income needs for expenses related to food, clothing, shelter, and transportation, among other things. These income needs will vary in amount and duration, depending on a number of factors, such as your spouse's age, your children's ages, your surviving spouse's capacity to earn income, your debt (including mortgages), and whether you'll provide funds for your surviving spouse's retirement.
• Special funding needs, such as college funding, charitable bequests, funding a buy/sell agreement, or business succession planning.

Once you determine the total amount of your family's financial needs, you subtract from this total the available assets that your family could use to defray some or all of their expenses. The difference, if any, represents an amount that life insurance proceeds, and the income from future investment of those proceeds, can cover.
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Example: John and his wife, Wendy, are estimating the appropriate amount of life insurance to buy on John's life. They first estimate their immediate needs as follows:

• Final medical expenses: $5,000
• Estate settlement costs including funeral and burial expenses: $37,500
• Debts, including credit cards and mortgages: $317,000
• Emergency fund: $100,000

Subtotal: $459,500

Next, they estimate ongoing income needs, such as:

• Providing for their dependent children's needs for a period of time: $500,000
• Wendy's income needs until her retirement: $450,000
• Wendy's retirement income needs: $380,000

Subtotal: $1,330,000

Adding the sub totals together, John and Wendy estimate that, should John die, their family would need $1,789,500. They then determine that assets available to offset their needs include:

• Bank savings: $40,000
• Investments: $220,000
• Retirement assets: $250,000
• Existing life insurance on John's life: $300,000

Subtotal: $810,000

The difference between their family needs ($1,789,500) and their available assets ($810,000) equals their life insurance need ($979,500).
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Review your coverage

Trying to figure out how much life insurance is enough isn't always easy, and that amount will likely change with your changing circumstances. By examining your family's anticipated expenses during various periods after your death, you get a more realistic estimate of your life insurance needs.

Unfortunately, many people underestimate their insurance needs and are underinsured. Often, the purchase of life insurance is based on cost instead of what's needed. By the same token, it's possible to have more insurance than you need. You may have purchased a large policy during a particular point in your life, and then didn't adjust your coverage when your insurance need was reduced. Both of these circumstances are reasons to review your insurance coverage periodically with your financial professional. Doing so can reveal opportunities to change your levels of coverage to match your current and projected life insurance needs.

Back to Basics :: Reviewing Your Budget

Do you ever wonder where your money goes each month? Does it seem like you have gotten sidetracked when it comes to reaching your financial goals? If so, you may want to review and perhaps revise your budget. Doing so can help you determine how you are spending your money, and that might show you what you need to do to get back on track.

"Oh, we don't need a budget," you might be saying. "We have plenty of money." If that is true, great! But if you are not reaching your financial goals, there is a reason for that. Reviewing (or simply creating) your budget might help you find out what that reason is.

Examine your financial goals

The first part of reviewing your budget should be an examination of your financial goals. After all, planning any trip's itinerary depends in part on knowing where you want to go! Make a list of both your short-term and your long-term goals, and prioritize them. How much will you need to save for each one, and how long will you have to reach them? Should you forestall some of lower priority to reach others of higher priority?

Keeping track

Budgeting is largely about tracking your income and expenses. You can do this with a pen and paper, or you can use one of the many software programs or web-based applications designed for this purpose. The most important element of this process is to do it consistently.

Should you count every penny? Not necessarily, although to some extent you cannot control the dollars if you do not track the cents. But focus primarily on meeting the basic expenses of life and then allocating what it will take to meet your goals.

Income and expenses

Much of your income may come from your regular paycheck or (if you are retired) from government benefits such as Social Security, a pension, or retirement account distributions. But do not forget to include all forms of income, such as child support and/or alimony, and even irregular or seasonal income, such as tax refunds, dividends, or interest.

Expenses generally fall into two categories. Fixed expenses are the "have-to" basics: housing, utilities, food, clothing, and transportation. Discretionary expenses are "want-to" items: eating out, entertainment, vacations, and hobbies.

Irregular expenses cannot be predicted, but they always occur: car repairs and home maintenance are good examples. Remember to include these types of expenses in your accounting. For example, if you buy tires for your car every 3 years, one-third of the total is your annual expense.

Caution: While you may find it easy to use your credit card for irregular expenses, do so only as a convenience. Be prepared to pay off the credit card charge with funds you have set aside in your budget for these expenses.

Finally, prioritize the funds you will need to meet both your short- and long-term goals as regular expenses in your budget.

And the answer is...

Once you have added up your income and expenses, you will need to compare the totals. Are you spending exactly what you are making? Congratulations, your budget is perfectly balanced! Even better, if you are spending less than you are making, you have a surplus. If that is the case, you can allocate that surplus to either reaching your goals faster or funding new investment opportunities.

But if you are spending more than you are making, you are running a deficit. You might not feel the pinch if you are very good at juggling or funding it with increasing credit card debt or a home equity line of credit. But even the best of jugglers drop the balls sometimes, and increasing your debt can be dangerous. If that is what you are doing, you are sidetracking your budget into a dead-end spur.

So, to balance your budget and get back on track toward meeting your goals, you will have to either increase your income or reduce your expenses--or both. As you may have seen while tracking your expenses, it is often your discretionary spending that leads to a derailment when it comes to meeting your goals. Rather than shortchange your goals (you will only be shortchanging yourself if you do), work on reducing discretionary expenses.

Staying on track

You will need to monitor your budget to keep it on track. Remember that, like life itself, you will need to keep your budget as flexible as your changing circumstances may demand.

How you can BENEFIT from New Credit Card Rules

If you have ever faced an unexpected rate hike on your credit card, a change to your monthly due date that came without notice or an excessive fee for a payment you made one day late, the new Credit Card Accountability, Responsibility and Disclosure (CARD) Act may deliver welcome relief.

Through this legislation, the federal government is trying to make the relationship between card issuer and user more balanced and fair for the consumer.  For one, this means credit card issuers can no longer raise interest rates at any time or for any reason after providing minimal notice.  In addition, they can no longer make other changes that unfairly penalize consumers.

The CARD Act curtails a number of unjust practices that have been troubling card users for years.  Some of the highlights include:

• More time to pay your bill :: Your credit card issuers must give you at least 21 days to submit your monthly payments.
• Clearer due dates :: Late-fee traps, such as weekend deadlines, due dates that change each month and payment deadlines that fall in the middle of the day, are no longer allowed.
• Limited interest rate increases :: Your interest rate cannot increase within the first 12 months of opening your credit card account.  In addition, card issuers generally cannot apply a rate increase retroactively to your existing balances, unless the increase is due to the expiration of a promotional rate, the stated rate is a variable rate or you make a late payment.
• Advance notice of rate increases :: Your card issuers must notify you at least 45 days (rather than the previous 15 days) in advance of any changes to the interest rate or other terms for your card.
• Elimination of double-cycle billing :: Credit card companies no longer can use your balance from the previous month to calculate interest charges for the current month.  Previously, even if you paid off your balance monthly, you could have been hit with finance charges computed from the previous cycle.
• Higher-interest balances paid first :: If you have balances subject to different interest rates (e.g., cash advances vs. regular purchases), your credit card company must now first apply any extra payments you make toward the highest-interest balance.  Previously, card companies typically applied amounts exceeding the minimum monthly payments to the lowest-interest balances first, thereby extending the time it would take to pay off higher-rate balances.
• Improved communication :: The new legislation requires credit card issuers to display on your statement how long it would take you to pay off your existing balance, and the total interest you would end up being charged, if you only pay the minimum amount due.  Your statement also must provide the payment required, including the interest component, to pay off your balance in 36 months.
• Limits on students :: The days of easy credit for college students are over.  Consumers under the age of 21 must have an adult cosigner to obtain a credit card or be able to show they can repay the debt. In addition, college students must receive permission from parents or guardians to increase the credit limit on their joint accounts.

Some unintended consequences
Unfortunately, there are a few drawbacks to the new CARD Act — many of which were experienced by consumers in 2009 as companies tried to offset the impending legislation by changing their credit card terms. And industry analysts and credit card companies warn of additional potential drawbacks as providers attempt to recoup some of the revenue they expect to lose as a result of the new credit card rules.

In particular, most card issuers have already begun to:

• Charge annual fees or raise other fees, such as balance transfer charges
• Cut back on rewards and perks, such as cash back, airline miles and hotel points
• Raise interest rates
• Reduce or eliminate interest-free grace periods
• Tighten their credit standards
• Lower credit limits

Actions you can take
Most of the provisions of the CARD legislation were in place by Feb. 22, 2010, while credit card companies must implement the entire set of changes by July 2010.  Now may be a good time to review the cards you currently hold and evaluate your options.  Consider cashing in any credit-card rewards and perks you have been accumulating — particularly if those benefits will be reduced or eliminated.

Also, watch for letters from your credit card companies — and do not just throw them away like you may have in the past.  These may be notifications of rate increases or other changes to the terms and conditions of your card.

If you find out that your benefits are diminishing and your fees and rates are going up, consider other credit options.  First, compare your card’s annual fee (if any), ongoing annual percentage rate, rewards and additional benefits to those of other credit cards.  Then select the more competitive card option.  Keep in mind that some issuers have already been following the more responsible practices set by the CARD legislation, which means they may offer rates and terms you can rely on.

Your financial advisor can help you prepare for these changes and discuss how responsibly managed credit card debt can fit into your financial picture.

Overhaul of Federal Student Loan Program

With the nuances of health care reform getting all the attention, you may be surprised to learn that the recently passed health care legislation—the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010—includes several provisions related to college. The most noteworthy of these provisions involve:

• The distribution of federal student loans
• Pell Grants
• Income based repayment for federal student loans

The distribution of federal student loans

Currently, there are two ways to obtain a federal student loan—borrow directly from the federal government under the William D. Ford Federal Direct Loan (“Direct Loan”) program or borrow from a private lender who participates in the Federal Family Education Loan (FFEL) program. The FFEL program has been in existence since 1965 (the Direct Loan program since 1994), and private lenders in the FFEL program receive government subsidies to encourage them to loan money to students.

Under the new legislation, private lenders will no longer receive government subsidies to make federal student loans, and the FFEL program will be eliminated. Starting July 1, 2010, all federal student loans will be made directly from the federal government to borrowers under the Direct Loan program.

Generally, student borrowers shouldn't notice much of a difference with this change. If anything, the new system should be simpler and less confusing, because borrowers won't have to "shop around" for a private lender to obtain their federal student loans.

Parents who wish to take out a federal PLUS Loan might find themselves better off because the interest rate on a federal PLUS Loan obtained through the Direct Loan program is capped at 7.9%, compared to the interest rate on a federal PLUS Loan obtained through the FFEL program, which is capped at 8.5%.

Pell Grants

The Pell Grant is the federal government’s largest financial aid grant program. It is available to undergraduate students with exceptional financial need (typically students from families who earn less than about $45,000 per year). Graduate students aren’t eligible.

The new legislation provides for automatic annual inflation-adjusted increases to the Pell Grant beginning in 2013. For the current academic year 2009/2010 (which runs from July 1, 2009, through June 30, 2010), the maximum Pell Grant is $5,350. It is scheduled to increase to $5,550 in 2010/2011, and will remain at that level for the following two years. It will then increase by the rate of inflation (via the consumer price index) in each of the next five years, reaching approximately $5,900 in 2019/2020.

Income based repayment

On July 1, 2009, the federal government's new Income Based Repayment (IBR) program went into effect. The IBR program was created to help college graduates manage their increasingly large student loan payment obligations. Under the program, a borrower’s monthly student loan payment is calculated based on income and family size. A borrower is allowed to pay 15% of his or her discretionary income to student loan payments, with any remaining debt forgiven after 25 years. The program is open to graduates with a federal Stafford Loan, Graduate PLUS Loan, or Consolidation Loan made under either the Direct Loan program or the FFEL program.

The new legislation enhances the IBR program. Under the legislation, borrowers who take out new federal student loans after July 1, 2014, will pay 10% of their discretionary income to student loan payments, with any remaining debt forgiven after 20 years.

:: Consult with your financial professional to see how these changes may affect you.

New Health Care Reform Law

Recently, two pieces of legislation, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 were signed into law. Together, these pieces of legislation make the most significant reform to health care in the United States since the enactment of Medicare.

The Congressional Budget Office estimates that by 2019, approximately 32 million currently uninsured Americans will have health insurance, at a cost of about $940 billion. A major component of the reform legislation is the creation of state-based American Health Benefit Exchanges and Small Business Health Options Program Exchanges to provide health insurance for low-income individuals and small businesses.

The following is a brief description of some of the most important provisions of the health care reform legislation.

For individuals

• U.S. citizens and legal residents will be required to have health insurance by 2014, with some exceptions. Those without insurance will face a tax penalty of as much as 2.5% of taxable income.
• Existing employer-sponsored health insurance plans will be allowed to remain essentially the same except the plans will be required to extend dependent coverage to qualifying children through age 26, lifetime limits (and eventually, annual dollar limits) on coverage must be eliminated, waiting periods for coverage cannot extend beyond 90 days, and insurers will not be able to deny coverage or charge higher premiums to people based on their health status and gender.
• Medicaid eligibility will be expanded to include individuals under age 65 whose income is less than 133% of the Federal Poverty Level.
• For families with incomes up to 400% of the Federal Poverty Level, tax credits and subsidies will be available to purchase health insurance through state-run exchanges, and to offset out-of-pocket costs.
• Contributions to a health flexible spending account will be limited to $2,500 per year. Reimbursements from health FSAs and HRAs for over-the-counter drugs will be restricted, and tax-free reimbursements from HSAs and Archer MSAs for over-the-counter drugs will not be allowed, while the tax on HSAs and Archer MSAs increases for distributions not used for qualified medical expenses.
• A rebate of $250 will be available to Medicare Part D (drug coverage) beneficiaries who reach the coverage gap (donut hole) and the coinsurance rate for costs within this gap are gradually reduced to 25%.
• Adults with pre-existing conditions will be able to purchase coverage from temporary high-risk pools until 2014, when coverage cannot otherwise be denied for pre-existing conditions.
• A national program will be established to provide limited reimbursement for long-term care expenses for individuals who participate by contributing to the program's cost through voluntary payroll deductions.

For employers

• Employers with 50 or more employees that do not offer health insurance coverage will generally have to pay a premium tax of up to $2,000 per full-time employee.
• Employers with more than 200 employees must automatically enroll employees in health insurance plans from which employees may opt out.
• Employers providing health insurance must offer a voucher to qualifying employees to purchase insurance through an exchange.
• Qualifying small employers may receive a tax credit for providing health insurance to employees.

Tax changes

• The threshold for itemized deductions for qualified medical expenses will be increased from 7.5% of adjusted gross income (AGI) to 10% of AGI, though a temporary exception will be maintained for those 65 and older. 
• The tax for Medicare Part A (hospitalization coverage) is increased 0.9% for individuals with earnings exceeding $200,000, and for couples with joint earnings greater than $250,000. Also, high-income taxpayers will be subject to a surtax of 3.8% on unearned income, such as capital gains, dividends, annuities, and rental income.
• The law imposes a 10% tax on the amount paid for indoor tanning services.

Some of these provisions are effective immediately while others will be implemented over the next several years.

:: Consult with your financial professional to see how these laws may affect you.

Financial Planning :: Helping You See the Big Picture

Do you picture yourself owning a new home, starting a business, or retiring comfortably? These are a few of the financial goals that may be important to you, and each comes with a price tag attached.

That is where financial planning comes in. Financial planning is a process that can help you reach your goals by evaluating your whole financial picture, then outlining strategies that are tailored to your individual needs and available resources.

Why is financial planning important?

A comprehensive financial plan serves as a framework for organizing the pieces of your financial picture. With a financial plan in place, you'll be better able to focus on your goals and understand what it will take to reach them.

One of the main benefits of having a financial plan is that it can help you balance competing financial priorities. A financial plan will clearly show you how your financial goals are related--for example, how saving for your children's college education might impact your ability to save for retirement. Then you can use the information you have gleaned to decide how to prioritize your goals, implement specific strategies, and choose suitable products or services. Best of all, you'll have the peace of mind that comes from knowing that your financial life is on track.

The financial planning process

• Creating and implementing a comprehensive financial plan generally involves working with financial professionals to:
• Develop a clear picture of your current financial situation by reviewing your income, assets, and liabilities, and evaluating your insurance coverage, your investment portfolio, your tax exposure, and your estate plan
• Establish and prioritize financial goals and time frames for achieving these goals
• Implement strategies that address your current financial weaknesses and build on your financial strengths
• Choose specific products and services that are tailored to meet your financial objectives
• Monitor your plan, making adjustments as your goals, time frames, or circumstances change

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Common financial goals:

• Saving and investing for retirement

• Saving and investing for college

• Establishing an emergency fund

• Providing for your family in the event of your death

• Minimizing income or estate taxes

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Some members of the team

The financial planning process can involve a number of professionals:

Financial planners typically play a central role in the process, focusing on your overall financial plan, and often coordinating the activities of other professionals who have expertise in specific areas.

Accountants or tax attorneys provide advice on federal and state tax issues.

Estate planning attorneys help you plan your estate and give advice on transferring and managing your assets before and after your death.

Insurance professionals evaluate insurance needs and recommend appropriate products and strategies.

Investment advisors provide advice about investment options and asset allocation, and can help you plan a strategy to manage your investment portfolio.

The most important member of the team, however, is you. Your needs and objectives drive the team, and once you have carefully considered any recommendations, all decisions lie in your hands.

Why can't I do it myself?

You can, if you have enough time and knowledge, but developing a comprehensive financial plan may require expertise in several areas. A financial professional can give you objective information and help you weigh your alternatives, saving you time and ensuring that all angles of your financial picture are covered.

Staying on track

The financial planning process doesn't end once your initial plan has been created. Your plan should generally be reviewed at least once a year to make sure that it's up-to-date. It's also possible that you'll need to modify your plan due to changes in your personal circumstances or the economy. Here are some of the events that might trigger a review of your financial plan:

• Your goals or time horizons change
• You experience a life-changing event such as marriage, the birth of a child, death of a spouse, health problems, or a job loss
• You have a specific or immediate financial planning need (e.g., drafting a will, managing a distribution from a retirement account, paying long-term care expenses)
• Your income or expenses substantially increase or decrease
• Your portfolio hasn't performed as expected
• You are affected by changes to the economy or tax laws

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Common questions about financial planning

What if I'm too busy?
Do not wait until you're in the midst of a financial crisis before beginning the planning process. The sooner you start, the more options you may have.

Is the financial planning process complicated?
Each financial plan is tailored to the needs of the individual, so how complicated the process will depend on your individual circumstances. But no matter what type of help you need, a financial professional will work hard to make the process as easy as possible, and will gladly answer all of your questions.

What if my spouse and I disagree?
A financial professional is trained to listen to your concerns, identify any underlying issues, and help you find common ground.

Can I still control my own finances?
Financial planning professionals make recommendations, not decisions. You retain control over your finances. Recommendations will be based on your needs, values, goals, and time frames. You decide which recommendations to follow, then work with a financial professional to implement them.

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Disclosure Information -- Important -- Please Review
The information contained in this material is being provided for general education purposes and with the understanding that it is not intended to be used or interpreted as specific legal, tax or investment advice. It does not address or account for your individual investor circumstances. Investment decisions should always be made based on your specific financial needs and objectives, goals, time horizon and risk tolerance. The information contained in this communication, including attachments, may be provided to support the marketing of a particular product or service. You cannot rely on this to avoid tax penalties that may be imposed under the Internal Revenue Code. Consult your tax advisor or attorney regarding tax issues specific to your circumstances.

Put savings (and yourself) first with a budget

Put Savings (and Yourself) First with a Budget

Where does that money go? America, it seems, is in the midst of a savings crisis. Personal savings rates have dropped in recent years and remain low by historical standards as many people continue to spend beyond their means.

If you're among those Americans who can't seem to save, it might be time to create a budget. A budget allows you to understand where the money goes and may help you free up cash for important savings goals, such as college and retirement.

Getting Started

Setting up a budget will require some work, but the benefits more than offset the time invested. How you create your budget is up to you. You may choose a piece of financial planning software, such as Microsoft™ Money or Quicken, or you may choose the paper and pencil route.

The first element of any budget is your income, or how much money you receive each month. This can include paychecks, legal settlements, alimony, royalties, fees, and dividends from investments that you do not reinvest. Once you know what your monthly income is, you can use a budget to make sure you don't spend more than you earn, thus helping to reduce debt and freeing up cash for savings.

Next, you need to know how you spend your money. Start by tracking your spending for a month. Gather bills and receipts, and don't forget to include newspapers from the corner store and trips to the soda machine. Don't assume any expense is too small to record.

Write down your expenses and break them into categories. Using a budget worksheet, we find Fixed Committed Expenses — mortgage, loan, and insurance payments that stay the same from month to month; Other Committed Expenses — things you can't live without, like food, utilities, and clothing; and Discretionary Expenses — things you like but don't necessarily need.

Less Spending = More Savings

Once you know where the money goes, it's time to analyze your expenses. There probably isn't much you can do about Fixed Committed Expenses without moving or getting rid of the family car. However, if these expenses are greater than your monthly income, you are probably carrying too much debt to effectively save.

You may find some room to economize in Other Committed Expenses, but look at Discretionary Expenses first. This is typically the easiest place to reduce spending. Begin by canceling magazine subscriptions to titles you don't read. Eat fewer meals out, or choose less expensive restaurants. Across much of the country, you can rent two videos for the price of a single adult ticket to a movie and throw in some microwave popcorn for a dollar more.

Digging Deeper

Once you've reduced discretionary spending, look at those Other Committed Expenses. Can you reduce the grocery bill with coupons or more economical meals? How about taking public transportation instead of cabs?

One area to closely examine is credit card debt. If a high balance is keeping you from saving, you need to find ways to trim those monthly payments. Call your credit card company and ask them for an interest-rate reduction, or shop around for a card with a lower rate. You can find a list of low-rate cards through CardWeb (1-301-631-9100 or online at www.cardweb.com). Beware of low introductory "teaser" rates that increase to much higher rates after six months.

You could also consider a home equity loan, which may offer a tax deduction, or a consolidation loan. Make sure that you'll be able to afford the monthly payments before you take the loan. Banks can foreclose on a home equity loan within 90 days if you miss payments.

If your savings are still being crushed under the weight of debt, or if you're having trouble making minimum monthly payments and covering necessary expenses, consider getting some help. The nonprofit National Federation for Credit Counseling (call 1-800-388-2227, or visit www.nfcc.org) can help you set up a budget and negotiate payment schedules with lenders for a modest fee. Once you start paying off your credit cards, the extra money can be used to build savings.

The Goal: More Savings

Once you've figured out where to economize, you can enter amounts in the Expected column of the budget. Notice that Savings and Children's Education appear under Fixed Committed Expenses. This is to encourage you to pay yourself first, a key rule of saving. By setting aside a certain amount each month for savings, you can build toward your goal without missing the money. You may be able to set up a payroll savings plan through your bank or credit union. Also look into any employer-sponsored retirement plans you may have at work, which potentially offer tax benefits along with savings for the future.

It might also help to set a savings goal, both for short- and long-term needs. Studies have revealed that families with savings goals tend to save more.

Remember that your budget is a living document. As your circumstances change, so will your goals and needs. Review your budget every few months to make sure it reflects your goals and to see if you are saving as much as you possibly can.

Points to Remember

1. You can use computer software or pencil and paper to create a budget.


2. Analyze your spending for a month to see where your income goes. If your living expenses are greater than your income, you'll need to find ways to economize.


3. Your spending can be broken down into three categories: Fixed Committed Expenses, Other Committed Expenses, and Discretionary Expenses.


4. To free up cash for savings, begin by reducing Discretionary Expenses, then look at Other Committed Expenses.


5. Pay down credit-card debt aggressively. Once the debt is paid off, direct the extra money to savings.


6. Set aside some of each paycheck for savings goals. Ask your bank or credit union about payroll savings plans and investigate your employer-sponsored retirement plan.


7. Review your budget periodically to make sure it is still in line with your needs and goals.