How Much Insurance is Enough?

I realized I hadn’t written about life insurance in a while.? As a matter of fact, the 5th blog I ever wrote about was on the topic and that was September 2016.? This also means I somehow have written a blog for the past 7 years every week, not bad for a terrible English student ha.

Today I’d like to focus on specifically life insurance and more specifically how to determine the correct amount of coverage for you.? Since protection planning is one of the key tenets of financial planning it is an important, yet not fun, topic to discuss.

The Basics

The first question to ask yourself is: do you want or need life insurance?? Since want is a very personal topic I won’t spend much time there.? Rather, the question is on need.? So, how does one determine if they “need” life insurance?? For starters ask yourself if I suddenly passed away would that leave a financial hardship for someone who is relying on your continued finances?? If yes, then you likely have a life insurance need.? The antithesis would be if someone isn’t relying on your continued finances, and by that, I mean either assets or income.?

For example, if you and your spouse are retired and/or have enough funds squirreled away you could retire, then truthfully you don’t have a life insurance need.? You see if you passed away your significant other isn’t relying on an insurance policy to supplement your assets, as you’ve worked diligently over a lifetime to save ample assets.

The Amounts

If you are still reading you either A. determined you need life insurance, or B. truly enjoy my writing which certainly I appreciate.? That said, once you determine the need the next two natural questions are type and need.? I’m going to skip over the type of insurance, although sufficient to say almost everyone should opt for term insurance, and focus on the appropriate amount of coverage.

This is a critical question that needs to be fleshed out.? How does one figure out the appropriate amount of coverage?? Easy answer work with one of these fine Diversified, LLC advisors and they can run fancy models for you, ??.? Additionally, I recommend the working backward method.

First, determine what big financial outlays you’d want to take care of if you passed.? Let’s take a look at Mr. and Mrs. Daffy Duck (see aren’t you glad you kept reading even though you don’t need insurance).? Let’s say they are 35 years old with 2 kids a home and one income of $200,000/yr.? If I were the Duck’s I would want my mortgage and college to be taken care of off the bat.? Let’s call the mortgage $400,000 and college for two youngsters $350,000.? Next, they have a combined student debt of $250,000.?

Thus, off the bat, the Duck family needs $400,000+$300,000+$250,000= $1,000,000 of coverage.? Now that they would be debt-free I’d still assume with two young kids they would want the surviving spouse to care for those children, and themselves.? I would use $1M of coverage for every $50,000 of residual income you want to leave behind.? So, in my example, the Ducks want to have $150,000/yr of income replaced in perpetuity.? That leaves us with a $3M void to round things off, leaving them with a total of $4,000,000 life insurance needed on the working spouse’s life.

But wait there’s more!? Now, just because the other spouse isn’t working doesn’t mean they don’t need insurance on that spouse.? If that spouse prematurely passes away there would certainly be financial hardships and additional costs for the surviving working spouse, such as the need to hire more help so they can continue to work.? Let’s assume the need is to still pay down debts, have college taken care of, and provide $50,000 of residual income to handle things like a nanny.? That means we are looking at a total need for the non-working spouse of $2,000,000 ($400,000+$300,000+$250,000+$1,000,000=$2,000,000).

That’s a lot of cash

I know it seems like a lot of money to leave behind, but honestly, it goes fast.? Additionally, if you go with term insurance it is relatively inexpensive comparatively.? I know the old joke, but I’ll be worth more dead than alive.? I’d rather look at it through the other lens of you almost can’t leave enough money behind to care for your most loved and cherished people.? I’ve been at this game for a long time and not once have I met someone who wished their spouse who got sick or passed had less life insurance.? As a matter of fact, I’ve heard some real-life insurance people in the past use that as a great way to determine the amount they suggest.? Picture you are going to pass away tomorrow, how much money would you want your family to be left with?? I still prefer my method, but the short answer is for most of us it is a lot more coverage than we currently have.

Hope you enjoyed this throwback blog, and as always stay wealthy, healthy, and happy.