The ultimate question. How much life insurance does my family need if something unexpected happens?
Well, most people shrug off the, how much do we need question, and proceed to believe that what they have at work is enough. They usually don’t know how much insurance they have and continue to live in this bubble world where work insurance is fine. It is hard to tell people though, especially as an outside Agent, that it is important to analyze these things. Annually work has open enrollment and this coverage can be reviewed. Most likely increases can be made, at that time, and other higher options can be available.
Work insurance, often, is for one year’s salary or $50,000. It is very rare that people take advantage of additional life insurance at work. They typically shrug off the need for more insurance and move on. I get it, no one wants to be insurance poor. People have other bills that are of priority such as mortgage, car payments, food, there are so many bills and expenses fighting for someone’s income. It is not a shock that no one wants to pay for more life insurance. They don’t really understand it could be simply $30 a month for half a million in coverage. It might not be a big deal and looking into it is well work it. Yet nowadays only 20% of people carry life insurance versus the 85% in the 1960’s. Also, people live longer and longer now. The need for life insurance seems to be less of a priority.
Once, at a job, I was offered $200,000 in life insurance coverage. It was my one-time opportunity at the time of hire, and I had to pay for it out of pocket myself. I was thrilled. No medical exam and automatic insurance for a premium. Here take it, here is my money, I said. I only have a $200,000 policy I bought when I was 27 before I had more serious health problems. Health problems are a huge factor when purchasing life insurance. Therefore, we must purchase early in life and the earlier we purchase the cheaper it is too.
Let’s revert to the main idea. How much life insurance do I need? Whether work is providing enough or not, we must try and determine a number to make sure we have the appropriate amount of coverage. An amount that is comfortable and affordable all at the same time. Some people want more luxury in their life insurance while others are just trying to get the basics. Regardless, as an Agent, I used this outlined acronym below. LIFE
Living Expenses
Income
Funeral expenses
Education
These are the four main concerns a family has when a parent passes away. Living expenses, how many bills are we left with? Mortgage? Income, how much income did we just lose? Funeral expenses, how much is the burial or cremation going to cost? Education, how much will it cost to complete my children’s education and colleges? These four areas are where we discuss the amounts needed to manage a future life without one of the parents.
Living expenses. In this area, we mostly discuss how much money is left on the mortgage. Do they owe $200,000 on their home. Maybe $400,000. This is usually outlined first. Other higher living expenses might be added here too. High car payment maybe.
Second, income. How much income was just lost? Did Dad make $70,000 a year? How much money are we going to need to replace Dad’s income. Maybe mom makes $50,000 already and only needs $25,000 a year for a few years to make this work.
Next, funeral expenses. This is pretty easy. We usually just add $25,000 to the total as that is the standard cost for a burial. I do know that my dad passed away recently and that was about the total of the final bill. We did get a tombstone and plot for my mom out of it but that was what it cost.
Last, education. How much money do we want to set aside for the children’s educational plan. Colleges and private schools? Let’s count the children and decide how much we need per child for the education the parents are willing to provide.
Some of these areas might be dwindled down to make sure that the family doesn’t have to spend too much on insurance. Yet some families really want to make sure they have that maximum coverage. Let’s see where someone might be at.
L – $200,000 left on mortgage
I – $200,000 is $50k for 4 years – They think they will be fine in 4 years with the mortgage paid.
F – $25,000 is the standard funeral expense.
E – $100,000 because they have two children and want to be able to fund bachelor’s degrees for both at $50,000 each.
*** TOTAL IS: $ 525,000 – would be the total of insurance that is perfect for this family’s situation.
At the age of 30, the $525,000 policy isn’t bad. Seriously, it could be $30. It would depend on the term or whole life arena of course. That is another beast. Otherwise though, this is how you determine the amount of life insurance that you need. The most appropriate amount and you can play around with these four ideas until you know where you are comfortable as a family.
