Outside Economics

Understanding the Amount of Life Insurance YOU Need

Posted by Wendell Brock, MBA, ChFC on Fri, Jun 02, 2017

The question is often asked how much life insurance do I really need? It is different for each person; however there are some basic formulas and a rule of thumb that help.

A rule of thumb is typically developed after going through so many iterations and calculations that the rule becomes a basic truth. Calculating the amount needed for life insurance is no different, as over the years many individual needs analysis have been calculated that a rule of thumb has been developed and it is quite accurate. That rule is basically 10-20 times a person’s annual income.Ins family.jpg

Now when this rule of thumb does not work, is if there is only one bread winner in the home and the stay at home spouse has little to no income. The stay at home spouse still has significant economic value to the family. Another case where the rule may not work is in the case of insuring children. (See article about insuring children here.) Children have great economic value in a family, and should a family lose a child, that is a grievous experience to go through. Receiving a death benefit, would provide the money so the family could take the time needed to grieve; while not necessarily needing to go back to work right away to pay the bills for a funeral. 

To get a more accurate amount of the life insurance to buy, a needs analysis is performed with a simple formula which helps zero in on the particular amount for one’s circumstances.

First, let’s review the purposes of life insurance, generally there are three major reasons for it: 

1. Financial care for loved ones in case of premature death 

2. Pay for final expenses of the decedent

3. Provide liquidity for the estate (business buy out, estate tax burden, complete a project, pay off a certain debt, assist with retirement income, provide a charitable gift.)

What it should not be used for is to profit from the death of a loved one. Also a person must have an insurable interest in the person they are placing the policy on. 

The formula for developing the needs analysis is basically Income needs for however many years, plus expenses that will need to be paid, minus current assets, including current life insurance policies. I like to print out a form and work the numbers by hand, simply because it makes the process more real. You can download a worksheet here

When I was a young adult my father passed away. He had a small life insurance policy, I am sure it was not much, simply because my parents could not afford much. But it was a great help to my mother when he did pass away. His policy did not pay for every little item we could have used or needed, but it did pay for several important cares of life, including his funeral expenses. I am the youngest in the family, and at the time of my father’s death I was in college, unmarried, and working part-time. My mother was a school teacher and getting closer to retirement. The value that small policy had on our entire family could not be calculated in simple financial terms, as it blessed our mother for years. Remember money is an emotional thing, its not just numbers. That peace of mind for my mother was incredible and I thank God for the agent who helped my father get the insurance. 

As you calculate your insurance needs don’t just look to the here and now, look off into the future as well. Needs can and will change over time. Many people these days find themselves raising grandchildren, thus putting them back in the position when they were young parents, affects their need for life insurance. 

These long-term needs should be covered with some permanent life insurance, while other short-term needs should be covered with term insurance. Often this can be - again a rule of thumb - approximately 20-40 percent of the total life insurance need. It is something that each person should consider and work with their agent to determine the proper amount in view of their long-term goals.

In the end, life happens and each person is left with needs and wants. We may not take care of all the wants, but each of us can make a serious dent in covering the needs with some form of life insurance - it is an inexpensive way to provide financial peace of mind for our loved ones.



"Gold is money, anything else is credit." ~ J.P. Morgan

Topics: life insurance, term insurance

Yuck - Life Insurance!

Posted by Wendell Brock, MBA, ChFC on Thu, Apr 17, 2014

about life insuranceThere are two things in life that are inevitable: death and taxes, as the old saying goes. This article will discuss ways in which you can protect your family upon your death with life insurance – there it’s been said; no one likes to talk about life insurance! While this may not be a very uplifting topic for most people, it is better to plan and be prepared for the event now, than to put it off and perhaps leave your family coping with both your loss and a personal financial crisis.

If you have young children at home, this is an especially important topic. It doesn't matter if you are a breadwinner or a stay-at-home parent. Having adequate life insurance coverage for both spouses will ensure that your family will be provided for once you are gone.

A good rule of thumb is to have ten to as much as twenty times your income in life insurance coverage.  If you are in debt, this amount should cover any remaining debt, burial costs and leave money enough to invest, whereby earning a rate of return that replaces your lost earnings.

If you have a small policy through your employer, that may not be enough. A small policy may be able to cover burial expenses and living expenses for about a year, but what will your family do after that? You may need to review it and consider purchasing a separate policy. Making sure you have plenty of coverage will allow your family to live comfortably until they figure out the next step in their lives.

Waiting too long to buy life insurance is risky for a few reasons. First, it is always possible that something may happen to you before you are able to buy a policy and your family is then left unprotected. You may have a change in health that could substantially increase your rates or even eliminate your ability to have life insurance. Also, life insurance is cheaper to purchase when you are younger and the rates are locked for the set time of the policy.

In considering the term length of the policy, don't try and save money by purchasing a shorter term. A lot of health changes can happen in a small amount of time and you could be hampering your future ability to have inexpensive coverage. As a general rule, if you are planning on having children in the future, having a 30-year or longer plan might make sense for you. If you have young children but are not planning on having any more, than a 20-year policy might be appropriate.

You may have needs that truly last a lifetime and would require a mix of term insurance and permanent insurance. That is a challenge is to properly asses a family’s needs and plan accordingly. Even though some needs may change over time, some financial needs are constant or some needs are replaced by other needs.

Insurance premiums are based on three general areas: the insurance company administrative expenses, company investment returns, and mortality expenses (death claims paid). Term rates are generally lower due to the fact that so many of the policies expire before the company pays a death claim. Fewer claims, lower premiums. Permanent insurance or cash value policies are typically in-force for a longer period of time and thus experience more death claims and thus have higher initial premiums. Even with term insurance, a 30 year term policy will be much more expensive than a 20 or 10 year term policy – the risk of death and thus the risk of paying a death claim is greater for the insurance company – so the premium expense is much higher.

It is good to review your policy from time to time to make sure your coverage is adequate to your needs. Circumstances and needs change as life progresses and you may find that the policy you purchased 10-15 years ago will no longer do for your family. Perhaps you are making more money now and your family is used to a higher lifestyle. Or maybe your health habits have improved and you can qualify for better premiums. Periodically assessing your circumstances can either help you save money or require additional coverage.

Be sure to shop around before you purchase your insurance. At times the cheaper policies have the most stringent underwriting standards, thus making the slightest health problem(s) a standard rate instead of the advertised preferred rate. Independent agents can pull quotes from many different sources, thus ensuring a competitive quote. Educate yourself before purchasing any policy.

Life insurance is a major part of a wise financial plan. Love your family enough to protect them from a financial crisis in the midst of their grief. Remember the insurance is not for you – its for the people you love most! Is your family properly protected?

Topics: life insurance, death, taxes, permanent insurance, term insurance, cash value, personal financial crisis, debt


Wendell W. Brock, MBA, ChFC

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