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How Much Life Insurance Do I Need? Or Want?

Having the correct amount of life insurance can vary vastly for each individual and their coverage needs can change throughout their lifetime.  Without the help of a professional, I tend to see many individuals that are under insured. 

When I talk to clients or prospects about the amount of life insurance coverage they should secure I go through the following story:

If you were legally walking across the street and you are hit and killed suddenly by a “Big Corporation Beverage Truck” how much would your spouse sue the Big Corporation Beverage company for?

The most common response is that they would sue for the maximum amount they were legally allowed to. This is the correct response and generally the amount is calculated based on income, how many years that person could work and an inflation adjustment. Then a present value amount is calculated.

 In the insurance industry, this is called human life value.  Depending on your age this amount is 10 to 30 times your gross income.  If you are in your 30’s and are earning $75,000 in income the correct human life value amount is $2,250,000 or 30 times your salary.    If you are 50 years old and are earning $150,000 your human life value may be $1,500,000 or 10 times your income.

If this is eye opening to you as it is for a lot of people, review your coverages! The best time to secure your life insurance is now. You may never be as healthy as you are today and you certainly won’t be any younger. 

You MUST insure your car to drive it and you must carry homeowner’s insurance to own a home.  Why aren’t people insuring their lives and income the same way?  This is an opportunity to educate people and go through a family security calculator to see how they feel if there was an untimely death and what decisions the surviving family would face. 

Add up your current assets and current life insurance coverages and really see what may happen if you are not here tomorrow.  What is the pot of money that your family has to work with to 10, 20, 30 years or more. What decisions would you want your spouse/children to make? Will the amount you have be enough? While going through this exercise, here some items to consider.

Immediate Cash needs of the family: Funeral Expense, Medical Bills, Debt pay off

Discretionary Cash needs of the family: Mortgage pay off, education funds for children, emergency funds

What is left over to provide income to your family?  Will social security benefits to your spouse and or children be adequate?

One factor that cannot be calculated in numbers will be how your family reacts emotionally to an untimely death.  Will your spouse be able to go back to work immediately?  Will the children be able to go back to school immediately?  Will your spouse/children need emotional support.   Securing the correct amount of life insurance on your life gives you options.  It buys time for your family to adjust to a new life without you. 

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