When it comes to deciding how much life insurance one needs, this brings up a great debate. “Enough to bury me”, is what some of my clients state. “I’m not leaving money for my wife/husband to spend on their next spouse, so give me the minimum.” “My kids will have to work for theirs, just like I did” or the infamous “bury me in a ditch!” I have heard it all! While life insurance is not a desirable topic to discuss, it is a conversation that needs to be had. Once a person has decided to have the “it” conversation, it now becomes a question of “How Do I Know How Much Insurance Coverage I Need?”
Let’s discuss a few simple tips to come up with a number.
The younger, unmarried, no children, bachelor/bachelorette:
“What do I need insurance for? I don’t have children and I’m not married.” Everyone needs insurance. Why? By protecting your insurability at a young age, you are guaranteeing to be covered whenever you decide to have children or be married. Insurance looks at 2 factors: age and health. The older we get, the more likely we are to get an ailment that makes us uninsurable. If your family has a history of illnesses, e.g. Diabetes or Cancer, you might want to get life insurance sooner rather than later. Keep in mind, someone would have to pay for your funeral AND if you owe bills with someone, e.g. a home, the life insurance can give the beneficiary enough money to pay off the debts. Keep in mind that insurance can benefit the insured too while they’re alive. When you have a permanent (whole life) policy, it accumulates cash value. With this, you can have a down payment on a house if you don’t already own one, purchase a car, travel the world, do whatever you want to do with it AND it is TAX FREE! (some restrictions apply). Take all of these tips into consideration when deciding on life insurance as a single person.
You have a newborn baby and you just purchased a home with your spouse of 2 years. You make 80,000 a year and your spouse makes 25,000 a year. Your mortgage is 550,000 and daycare will be 1,400 a month for the next 5 years. Car is paid off and there is no additional debt at this time. How much does this family need? Rule of thumb is to multiply your salary by at least 10 to get a baseline amount. By multiplying your salary by 10, this will carry your family on your salary for the next 10 years, until the money runs out, but wait! You have a mortgage, daycare and a brand new baby that will probably go to a college. On top of the 10 times your salary, you need enough to cover these other expenses, in case one of the bread winners pass away early. Wow! Sounds like a lot? Believe it or not, you have only provided for the bare minimum for the family. At least with this amount, the family’s current lifestyle will not be disrupted and the future will be taken care of.
If we think about how much the client making 80,000 needs in life insurance, let’s do the math:
800,000 (80,000 salary X 10)
84,000 (child care – 1,400 X 12 = 16,800 for the year, 16800 X 5)
300,000 (college – it will be much more expensive in 18 years)
1,734,000 needed to replace the income of the spouse making 800,000 and not disrupting the family’s lifestyle
DO NOT be afraid of these numbers. Know your worth and the value you bring to your family.
It’s better to be proactive and prepare for the future than to be reactive to an unexpected situation. Trust me, you will be glad you did.
Feel free to reach out to me if you have any additional questions or would like a quote.
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Next week’s topic:
Mutual Funds – Who are the different types of investors? Which one are you?
Until next time, have a great week.
Changing the lives in our community….one person at a time.