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Continuing on with our theme of the the past few weeks, we're going to cover another of those topics that would have probably been really useful for our community about 60 some odd episodes ago. Oops…sometimes we get all excited in talking about things that we generally regard as more interesting and in doing so we totally step right over the more obvious topics that might actually help people.
That being said, we extend our apology for missing this and we're diving head first into these sorts of topics now. Also, we'd like to ask if you have any suggestions or topics that you'd like for us to cover, please let us know!
Now, let's get into today's topic and help you figure out just how much life insurance should you buy?
10x your income…right? Or at least that's what conventional wisdom says.
If it were really that simple, I guess we'd not have much a business. Unfortunately, it's not always that simple.
Now, have a death benefit that's 10x your income is not a bad starting point and it's certainly better than what most people have, which is nothing. But alas things are a bit more complex than this simple rule of thumb for most people.
What's the Amount?
Is there any sort of consensus among life insurance industry professionals/agents as to how much life insurance a person should have? No, not really.
There are really two distinct ways to approach the calculation:
1. The traditional approach–the Capital Needs Analysis (here's an example of one we put together a while back):
[slideshare id=13564291&doc=capitalneedsanalysis-120706124619-phpapp02&type=d]
As you can tell by quickly glancing this form, you'll notice that this uses a very formulaic process for arriving at the death benefit that you need to insure. It's a very logical and mathematical process.
2. Human life value–based on your income and your age, we can tell you what the net present value of your earnings are and that's the amount of life insurance you should buy. If you want to use a nifty online calculator for that, you can find one over at dinkytown.
Generally speaking, human life value will generate a larger death benefit need but some will argue that it provides a more accurate projection of your actual life insurance need.
Simple Enough…Right?
Yeah well…
Both of these methods will work and are a really good place to start, however, we think the discussion warrants a bit more time and consideration. Realistically, the raw calculation of “how much life insurance do I need?” only takes 5 minutes.
The real work is in figuring out exactly what you want the death benefit to do. What do you want it to accomplish? And we're not talking about giving sort of generic answers like: payoff the mortgage, send the kids to college, etc.
No, we mean getting really specific about everything that you'd want the money to do and laying out a plan to make sure those things happen. Let's not put our spouse, significant other, children, and extended family in a situation where they're trying to guess about these things after you're gone.
Let's spend some time mapping out a strategy and thinking about how life should carry on after you're gone. We're talking about defining things so that there's ‘x' amount to go toward ‘y' and so forth. You should clearly identify those things. Consider this, captial needs analysis is pretty good at helping you arrive at a number based on specific goals that you may have for your family should you meet your demise,
However, it's pretty bad at spelling out a strategy for how exactly you should execute that strategy when your beneficiary(s) receive the proceeds of your policy.
Should We Plan on the Same Budget or a New Budget?
We know that many people use their current budget to plan for the future even if the primary breadwinner was passed away and we think that's a mistake. What am I talking about? Well, there are many who believe it best to plan on having enough life insurance death benefit to pay all of the outstanding monthly expenses as they stand today.
We argue against that.
Our belief is that you should plan on mitigating as many of those ongoing expenses as possible. Confused? Jump in at 21:28 and hear us discuss this in more detail. Hearing our discussion there should add some clarity and perhaps give you an “ah-ha” moment!
All of the changes your family will undergo are really hard to predict and life for those who are left behind will change in ways that you can't imagine. So, spend a little more time thinking about this, develop a detailed strategy and makes sure you've answered all the questions that you can for those you leave behind.
Thanks for joining us today and have a Happy Thanksgiving!
The reason for owning Whole Life Insurance after retiring is because a couple who both worked their whole lives are still ‘working’. Let me explain.
If both a husband and wife are collecting $20,000 annually under Social Security, plus taking $20,000 from their 401k portfolio, they have a gross income of $60,000. Now let’s say the husband dies at age 70. His wife would then have only $40,000 income because his Social Security checks are gone. Does anyone believe a widow’s cost of living will go down by 33%? Yes . . . Sure.
If the husband had been insured with a $200,000 (+/-) whole life insurance policy, the proceeds could have been flipped into an annuity, and the widow would have about $20,000 until she dies . . . Whether at age 71 or 91.