Life Insurance. It’s a product everyone is vaguely familiar with and one that many people own. But there are are probably large numbers of people who think they probably need some life insurance, but then get hung up on the questions of what type and how much. And, rather than subjecting themselves to what they perceive might be a sales pitch from some agent, they just let the question go.
The subject can be complex enough for a small book, but I’m going to simplify it enough for a short blog. At first I was going to address both what types are available and then how much you need, but the blog ended up way too long. In this blog, then, we will only talk about how much and we’ll talk about the different types another day.
First, though, the initial question is this: Do I need life insurance at all? This is a real simple one and only requires two questions.
- Will your death have any financial impact on anyone?
- Do you care about that person?
See, that was simple! And for you young people, out on your own with no obligations, you’re already figuring you don’t need it. And, if you have no parents, brothers or sisters who would probably feel obligated to step in and make sure you get a decent funeral, you may be right. But, families can be like that, all sloppy and sentimental, so keep that in mind. And please, don’t tell me how they can sell that fine car of yours (which probably isn’t paid for anyway!) to take care of any expenses. First, it probably isn’t worth that much and second, the funeral home isn’t going to wait around for a buyer to show up — somebody will have to write a check. Now that’s out of the way, let’s get to the rest.
Now, how much? For the single person who is over legal age, just make sure there’s enough for funeral expenses. My opinion is just forget about paying off student loans, mortgages, credit cards, etc. I mean, really, who cares that your credit is ruined! Just make sure that whoever is going to step in and give you a decent funeral (or a fun wake!) has the cash to do so.
For a married or committed couple the planning gets more complex as you try to calculate how much your spouse may need while the kids are small (and she or he is collecting survivor’s Social Security benefit) versus how much they’ll need later. A good planner can help you through some sophisticated numbers to figure all that out, but I’m going to cut right through that so you can come up with a pretty good estimate of where you’re at.
Take your household income (you and your spouse, if both are working) and multiply it by 70%. That’s what the Department of Labor has calculated that a surviving spouse will need every month to maintain the same lifestyle you now have provided that a few other items are taken care of. A separate fund must be provided to pay off a mortgage or provide ten years of rental payments, a separate fund must be provided for childrens’ education and a separate fund must be provided to pay off credit card and store accounts.
Let’s say you make $50,000 per year and your spouse makes $30,000. Seventy percent of your household income is $56,000. Now, your spouse is making $30,000, so she’s going to be $26,000 short every year. Next, take an investment figure that you’re comfortable with. Right now even 2% is pretty scary, but over the long haul many planners have been comfortable using 5% for planning. So, simply divide the $26,000 by .05 (or whatever number you choose) and you get $520,000. That’s right, if you had %520,000 earning 5%, it would provide $26,000 per year to your spouse without invading the principal.
So, the final tally is like this:
- $520,000 for loss of income.
- The amount needed for 4 years of college per child.
- The amount needed to pay off your mortgage today.
- The amount needed to pay off your auto loans, credit cards, etc.
Add it all up, and that’ what you need to keep your death from causing a negative financial impact on your surviving spouse. Yes, it’s a big number, but keep in mind that any savings you have and any income property you may have can be used to offset either the income or debt figures.
Finally, keep this very important thought uppermost: You now have a realistic idea of how much life insurance you need. Maybe you don’t have enough and, frankly, maybe you can’t afford it all right now. But here’s my advice: start planning now to do something toward reducing the impact your death might have on someone else. The fact is that something is better than nothing. Get a price for some term insurance and you may be surprised. Because we are living longer than we used to, life insurance is one of the few things that has actually decreased in price.
So get out your calculator, see where you’re at, and get going! In a future blog I’ll go over the various types of life insurance.
