Life Insurance
How Much Life Insurance Benefit Do I Need?
Before we answer that question, let’s consider what your beneficiaries can use the money received upon your death can be used for. In short, the answer is “anything.”
To be more detailed, Life Insurance benefits, upon your death, can:
Provide a lifetime income stream for your family
Pay for your final expenses (funeral and other costs)
Provide liquid assets that your executor can use to settle your affairs without selling anything
Pay off debts due immediately upon your death, like a car loan
Pay off your mortgage, and other debts you may have
Provide an inheritance for your children or grandchildren
Provide an endowment for your favorite school or non-profit organization
Provide for those big expenses in life; childcare, a college education, a child’s wedding
Fund your family’s budget for many years to come
Offer ready funds for your business
And many other uses
Beginning to Think About How Much Life Insurance Benefit You Should Choose
The answer to this question is different for each of us, depending on many factors specific to our life, family, our income, etc.
This great video from one of the life insurers we work with, Ohio National Life, is a great way to begin visualizing the need:
Calculating the Life Insurance Benefit for Your Policy
The expenses of “daily life” can really add up over 10-50 years, so you want to correctly determine the Life Insurance benefit your beneficiaries will need if you are no longer there to protect them.
A lot of people, as they tackle this question, think they are choosing too much, almost feeling embarrassed about it… why would their family ever need $250,000, $500,000, $1 million or more at one time? That does sound like a lot of money, but they receive the monies at one time, to be used over time. Imagine if one of those amounts had to pay for a funeral, retire credit card balances, a mortgage, and other debts, pay ongoing expenses for many years, put your children through college…in other words, support your loved ones for many years to come. Would even those amounts be enough? How would you know?
There are two main ways of choosing an adequate Life Insurance benefit; 1) Adding up the costs to be covered, and 2) Choosing a benefit amount that can replicate the deceased person’s income indefinitely, to make sure the family budget can be funded just as it was before the person died.
1) Adding Up The Costs:
To start, estimate what your family members would need after you’re gone to meet immediate, ongoing, and future financial expenses Then, add up the resources your surviving family members could draw on to support themselves. These would include things like a spouse’s income, accumulated savings, life insurance you may already own, etc. The difference between the two is your need for Life Insurance. (try the calculator to run the numbers)
This mathematical equation may seem simple enough, but coming up with all the inputs can get tricky. Plus, you’ll need to factor in the effects of inflation and assumptions about how much your investments will earn over the long run. Plus, what if you miss something? A family figuring the amount 20 years ago would not have known to figure for a monthly cell phone bill!
2) Replicating an Income:
Your family budget is most likely funded by one or two incomes (if both you and your partner both work). In this option of determining Life Insurance benefit we choose an amount of money that could fund the family budget, so that the budget continues without interruption, even if a spouse died. The Life Insurance policy’s death benefit replicates the deceased family member’s income for a period of years; 10, 20, 30, etc.
Example:
A married couple with 2 children, each adult working with an annual income of $45,000. The $90,000 income allows the family to pay for all the ongoing expenses in a family, and even save for the future expenses, like college and retirement. To replicate an income each spouse could carry a Life Insurance policy with a $750,000 benefit.
How did we figure that? Let’s say one spouse died, and the other spouse received the $750,000 as beneficiary. The surviving spouse could invest the $750,000, and at an annual 6% return, use the money made in the investment each year ($750,000 x 6% = $45,000)to replicate the second income. Nothing changes financially.
A more conservative beneficiary might just put the money in the bank, with no interest. Then the $750,000 would last almost 17 years ($750,000 / $45,000 = 16.66 years).
A quick way to come to that number in this idea of replicating someone’s income with Life Insurance is to multiply your annual income by 16.67.
John and Sherri’s Life Insurance Story
“Life Insurance to me is peace of mind. To allow me to be the dad my boys need without their mom. -John
Running a bakery—with crack-of-dawn start times and seasonal crunches—can be tough work, but Sherri and John Horsley loved their small business. The business fit their strengths well. Sherri’s boundless enthusiasm made her the perfect up-front person, and John gravitated to the behind-the-scenes baking. Plus, running their own small business allowed them the flexibility to spend time with their two young sons.
While it was still a new operation for them, the couple met with their insurance professional, Greg Call. to make sure that both their business and their futures were financially secure. And, indeed, Greg saw a gap in Sherri’s life insurance coverage, and she purchased coverage.
As the business grew, Sherri and John sat down for an annual review with Greg and worked on a new life insurance needs analysis. They discovered they needed more, so they increased their coverage.
Then, just as the holiday rush was upon them, Sherri discovered a lump, which doctors told her was breast cancer. While continuing to run the bakery and go to school for her Master’s in family counseling, she bravely battled the disease. Sherri at first experienced a period of remission. But the cancer returned. Sadly, it was the devastating disease that took her life at just 45.
As John says, “The life insurance has made all the difference in the world to us.” It gave him time to grieve, as well as find a buyer for the business so he and the boys could move closer to family. John has also secured the boys’ college education and his own retirement.
“We knew life insurance was important, but didn’t understand the value until now,” he says. “I can say in hindsight that the sacrifice of putting money aside for life insurance—to give you peace of mind and less stress—is totally worth it.”
Free Life Insurance Quote
Complete the below form (designed to take you 2-3 minutes) and submit below. We'll send you a free quote of life insurance coverage tailored to your coverage needs! You are also welcome to call us for a quote, or with your questions, (919) 357-6637.
Along with a quote of Life Insurance coverage we will send you this great brochure entitled "What You Need to Know About Life Insurance."
To keep learning more, click here for the next page explaining the different types of Life Insurance.