How To Determine, according to New York-based John Savignano
According to John Savignano CPA, “Insurance is very powerful in terms of what you can do with it.” And he’s sharing his knowledge on how to pick the best policy and make it work for you.
The purchase of life insurance can be prompted by any number of different reasons. Because every person’s situation is different, determining the right one means understanding what the insured hopes to accomplish with the money should they pass away.
John Savignano’s Approach to Finding the Perfect Policy
John Savignano CPA, CEO of Bottom Line Consulting, became interested in finances when his grandmother gave him some money to invest for her. Since then, he’s honed and expanded his monetary skills while building a level of trust among his clients.
As the founder and president of Savignano Accountants & Advisors, John Savignano provides a range of financial services including business valuation, accounting, and information technology to clients in the greater New York City area. His focus is on getting a clear picture of where each of his clients is so he can craft the ideal financial advice.
Protecting Loved Ones: The Most Common Reason for Purchasing Life Insurance
According to John Savignano, the primary reason given for buying life insurance can be put very simply: “If someone’s loved one passes away, you want to make sure that the surviving people are able to survive.” To find the policy that’s best for a specific individual, it’s necessary to dig deeper.
A married person with a young child or two who is the sole breadwinner has very different needs than someone whose spouse also works as they put their kids through college. For the first scenario, a term life insurance plan could be the right choice.
Says Savignano, “Term insurance is very cheap. Maybe a couple of hundred bucks a year [you] can buy, especially if you’re young and in good health. For a few hundred bucks a year, you can buy yourself a $500,000 policy.” This type of insurance tends to be affordable and allows the insured to purchase a significant amount of life insurance at a budget-friendly price.
As one ages, permanent life insurance that offers the option for a cash payout might suit the insured better. Permanent life insurance pays out a death benefit regardless of when the insured dies. There is also a savings element with this type of life insurance.
Says Savignano, “A universal life insurance policy acts like a bank account. So it could be another type of asset investment for you that if you want to put money away, it’s like a deferred retirement account could put money away. The earnings could generate on a tax-free basis.”
Protecting a Business Interest
Another way life insurance can be utilized is to protect the applicable interests within a business. If one partner passes away, the other can buy out their interest in the company and keep it going as intended. Without the correct type of life insurance policy, however, the business could flounder — and perhaps not recover at all — while the estate is working its way through court.
Hedging Against Estate Taxes
While it’s long been used by the wealthy as a hedge against estate taxes, this strategy can also be used by others as a way to build wealth. By purchasing generous life insurance policies, upon the death of the insured, the insurance company pays the estate tax.
“If you’re going to decide that you’re not going to have a will or some sort of estate plan, just think of the position that you’re putting your loved ones in, in the event that someone takes you away,” Savignano cautions.
Along the way, the money the insured pays into the policy grows and compounds. It’s been used by people to gain massive wealth in a simple and understated way.
Estimating Life Insurance Needs
Some people purchase life insurance to ensure that their final expenses are paid for and don’t become the responsibility of someone else. For most people, though, their reasons for purchasing this type of insurance encompass several goals.
Keep the following factors in mind when thinking about how much life insurance to buy.
Consider not only how much income the insured is adding to the household, but also how long that money will be needed by survivors. A good way to think about it is to multiply the yearly income of the insured by the number of years until their youngest dependent graduates from high school.
If a dependent attends a private school and/or the insured wants to make sure there’s enough money for college, the amount of the life insurance policy needs to reflect that. The cost of college can range widely but aiming for $150,000 for each dependent is a good start.
In addition to credit cards, vehicle notes, personal loans, and other types of debt, it’s crucial to determine the actual payoff amount for a mortgage. Many people also have a second mortgage or a home equity line of credit.
Adding all the debt an insured has will help determine the appropriate type of life insurance vehicle for their particular situation. Include in this figure at least $10,000 for their final expenses.
It’s important to note that the money aspect is not the only consideration to keep in mind when determining the best life insurance policy. The key is to look at any other elements in the insured’s life — aging parents, a disabled child, or ownership of a business, for example — that could affect the type and amount of coverage needed.
Taking a look at the big picture, as well as the tiny details — and how they’re all interconnected — ensures that the insured has the coverage needed in the unfortunate event of their death.
“I have the trust factor with my clients. I think I can do better due diligence in determining whether or not they need a policy and what policy they need, and actually sit down with them and sort of educate them on that and get them the right policy and make sure it’s a good long-term fit for them,” he says. “And that’s why pretty much I got into this.”