With the unprecedented generational bear market that has wreaked havoc on investors’ portfolios, this is a good time to review life insurance quotesand determine if you have enough coverage. Remember that you depend on the combination of your investment assets plus your life insurance to make sure your dependants are financially secure should you die prematurely. How much life insurance do you need? Ask ten professionals and you are likely to get ten different answers. If you have people who are dependant on your income for their support, use the following three-step process as a ‘quick check’ of your life insurance needs:
If you are the sole income provider, multiply your annual income by 0.80. (NOTE: If both you and your spouse work, combine both incomes and multiply by 0.80.) This results in reducing your income by 20%. The reason you do this is because there is one less spender in the household (you!).
Divide your answer in Step 1 by the rate of return you would reasonably expect to earn on the life insurance proceeds once they are invested. Your answer here indicates how much money you will need in order to continue the necessary income stream to your surviving family.
Subtract any savings or investments you already have from your answer in Step 2. This is the amount of life insurance you should own.
Let’s look at an example. Edward and Jean Anderson have two children. Edward earns $100,000 a year and Jean stays home to raise the children. The parents assume that they could earn 6% on investments; they have $45,000 in personal investments and $75,000 in their retirement plans.
Edward’s Income $ 100,000
“One Less Spender” Factor x 0.80
Adjusted Income Need $ 80,000
Adjusted Income Need $ 80,000
Divided by Expected Rate of Return (6%) ¸ .06
This amount of money invested at 6% will provide the needed $80,000 per year for Jean and the children.
Capital Needed $1,333,333
Minus Current Savings and Investments – 120,000
Edward’s life insurance need $1,213,333
If Jean was employed and planned to continue working after Edward’s death, you would also subtract her income from your answer in step one. You would also need to repeat this exercise for Jean to determine how much life insurance is needed on her life For a non-working spouse, estimate the costs to replace that spouse’s services such as nanny and housekeeper and multiply those costs times the number of years the services will be needed.
The answer you get by using this three-step process should only be used as a rule of thumb. Once you have the number, you should personalize the solution to your particular situation. For example, you may want to increase the amount of insurance to help cover the costs of funding college expenses for your children. Or, you may want additional insurance that would be used to pay off some of your debts. If your goal is to provide a lifetime income for your dependents, additional insurance will be needed to offset the ravages of inflation. For a more detailed analysis, visit the Resource Center at www.welchgroup.com; click on ‘links’; then ‘Life Insurance Needs Estimator’.