The better question might be what to do with the life insurance after you have purchased it. But more on that later. For now, the simple answer is that you should only spend what you can afford to pay, provided that the amount may sustain your family. In purchasing life insurance, the amount should reflect burial expenses, the number of years your family will need to be sustained, the annual net (after tax) income your survivors will need, the number of children (and their respective ages) planning to go to college, and other expenses such as new cars, weddings, home improvements and mortgage payments.

Thankfully, you do not need to do the calculations on your own, but several online calculators are available. It is probably best to choose the calculator wisely, and do the basic research into life insurance amount before you begin placing calls. One calculator that appears to be neutral (not sponsored by one of the many life insurance companies) is located on MSN Money.

Life insurance may present problems for your estate. It may increase the size of your taxable estate, thus leaving less to your beneficiaries and more to the federal government. The beneficiaries of the policy may be may be immature and unable to administer the funds properly on their own. Placing the life insurance policy in an irrevocable life insurance trust can decrease the size of your estate for tax purposes; allow a trustee to administer the funds properly to beneficiaries who might spend it unwisely; and break the lump sum into manageable payments. Trusts give the settlor the power to shape the distribution of life insurance proceeds from beyond the grave, and are a powerful method of estate planning in California.

Filed under: Trusts