Most Recent Update; Sept. 16, 2017: How Much Life Insurance Do I Need.
The “Ask a Question” mailbag: How Much Life Insurance Do I Need?
“How do I calculate how much life insurance do I need as part of my estate plan? My principal goal is making sure I provide for my children until they graduate from college.”
How Much Life Insurance Do I Need? A Rule of Thumb.
Over the years I have heard a few rules of thumb about the amount of life insurance a person should own. The most common general rule bantered about is having a policy 10x your salary. While it is nice to have a fast rule, there are other factors you should consider. Don’t worry; it won’t take much time.
Beyond the Rule of Thumb.
Life insurance is a tool. Think of it as a means to address your particular need. If you can’t identify your need, then you are not yet ready to buy life insurance. In your case, you have identified your need. You stated that you are purchasing life insurance to address a specific concern; providing for your children until they are out of college.
Determine Insurance’s Purpose.
In your case, you are purchasing life insurance to address a specific concern; providing for your children until they are out of college. Some people will have other goals. Such as providing enough money to pay for a wedding or down payment on a house. Others wish to leave spouses financially unburdened, especially if the spouse has no means of income.
What Factors Impact Your Goal?
For you, the factors to consider are the children’s ages, the cost of raising them until age 18, and the expected costs of education after high school for each child. If your kids are older or will attend a state school, your needs are less than if you have younger children who will likely wish to attend a private school.
In other cases, factors include the size of debts you wish paid off, your spouse’s ability to maintain his or her lifestyle without your income and the need for a spouse to take time some off from work.
Calculating Your Numbers.
The actual number crunching is beyond the scope of this blog, but your financial and insurance advisor can help you estimate the costs your factors present. They can also help you calculate your current annual expenses and the amount necessary to cover those costs if they stay unchanged at your death. There are also several excellent sites on the internet you can utilize to help arrive at these numbers.
Once you have identified the life insurance’s purpose and an approximate amount to address that goal, you are ready to answer the question, “how much life insurance do I need.” No longer dealing with generalized number, you may with confidence determine if adding to that number is a wise use of your money. Your insurance professional can also provide you with various quotes of different types of insurance in the relevant range.
There is no one-size-fits-all method to arrive at the correct size insurance policy that will address your need. But, by taking a little bit of time, you can arrive at a reasonable estimate of what size death benefit will satisfy your needs.
I suggest that you document and file how you arrived at your calculation. As time pass, you then can more easily revisit your reasoning. These notes will provide you with the basis to determine if the policy need be increased to address a rise in need or decreased as needs diminish. Speaking from experience, without good notes remembering your reasoning from 5 or 10 years prior is difficult.
For each of my estate planning clients, I assemble a summary of estate documents and a list of assets. This way if the client dies the executor can quickly and inexpensively secure assets. I share this throughout the year, so the data remains current. The summary is also a convenient location for notes on insurance policies. We help keep your house in order!
We Can Help!
I exclusively focus my practice on estate planning. And, I am happy to work with you to review your insurance and to make sure your estate plan is in order. I am glad to walk you through your options over the phone or in person.
Please feel free to Contact our office for a free consultation. Let’s talk!
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Author, Peter Klenk, Esq.