6 December 2013 0 Comments

How Much Is Enough?

how big is big?How much Life Insurance do you really need?  It’s easy saying one should purchase life insurance equal to a given multiple of current income, but how can a given multiplier be accurate for all people?  It can’t be.  If you are in your 30’s with three young kids to support, the multiple of income is greater than it would be if you were age 58 with all kids grown, a spouse who is currently working and a substantial 401k plan.

The most accurate way to determine how much life insurance is enough is to determine what your family would need if you were taken out of the picture tomorrow and what assets and benefits there are to fill that need.  This is the “total needs analysis” approach to building a life insurance program.

It’s a reasonably simple process, at least when you have computers and a good software program to do the calculating.  First, determine how much income in today’s dollars your family would need to meet normal living expenses.  If you want enough cash for your home mortgage to be paid off, then the required income would be less.  Next, select an inflation factor so the income in the future reflects change in the buying power; 2% is probably a good figure to use.  Then select an earnings rate that might be expected on insurance proceeds to be invested; 5% is a figure often used.  Add to this a lump sum for final expenses, any other fixed obligations you may want paid off and perhaps an education fund for your kids.

The computer will tell you the present value of these needs.  From this subtract all current assets, presently owned life insurance and Social Security Survivor income benefits.  The result of this calculation is the amount of cash required to meet these future living needs of your family.  One way to guarantee this cash is life insurance.

Many computer programs are available to produce these calculations.  However, in my search I discovered that most of them do no include Social Security benefits.  The survivor benefits under Social Security can fill a major portion of income needs, so any results that do not take this into account are erroneous.   A program I found that does include Social Security benefits can be accessed through the following link: http://calcxml.com/calculators/life-insurance-calculator.

It can be an eye opening experience to do your own “total needs analysis.”  Once you have, then locate a good, independent agent who can assist you in the best way to fill this need.

Next, I’ll be dealing with how to determine the correct amount of life insurance for business related needs.

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