This is my first ever blog on the topic of insurance!! Let me tell you… nothing is more exciting than life insurance (wink wink…).
So, hang in there with me, friend. I promise to do my best to transform the negative gloom around the topic of life insurance and produce an article that is POSITIVE and brings you PEACE OF MIND!
If you start to feel stress creep in while reading, take a pause. Think of something that brings you peace. Maybe that is a vacation memory, a mantra, or the thought of your family being provided for <3
This article is geared more directly to readers with a dependent spouse or children, but the principals apply to many other situations.
So, let’s jump into the big question. How much life insurance do you need to protect your loved ones?
First, pause to download and complete my Life Insurance Needs Analysis from the box below! It will make the process MUCH easier. Just enter your email address, and you will receive a link for own copy of the spreadsheet 😊
If you prefer to make your own table, I will provide some formulas.
Step 1: Add $15,000 to your Life Insurance Needs Analysis
Why are we starting with $15,000 right off the bat? Because the average funeral costs $7,000 – $10,000. Your family needs money for a funeral, final estate taxes, and other end-of-life expenses – that’s why I like boosting it up to $15,000.
Why else? Your family may get more closure knowing they can afford to throw you the “goodbye party” you deserve!
Step 2: Add your mortgage balance
I have gotten to know some of my readers fairly well… and I know you want your families to live freely if you pass away. If your mortgage was covered by insurance, your family would have so much financial freedom!
Do you have peace knowing that your family would always have a place to live and wouldn’t worry about meeting a mortgage payment every month?
TIP: Over time, your mortgage decreases. So, over time, the level of insurance you need should decrease too! This is why I like term policies.
Step 3: Add other outstanding debts
Most debts should be insured. Especially the ones whose related assets have no resale value. What do I mean by “no resale value”?
Well, your college degree has no resale value. If you die, the college will not buy your degree back from your family. Therefore, if you have private student loans, you should carry enough insurance to cover the bill. Note: Not all private student loans require repayment upon death. ABC News has a helpful article HERE.
Alternatively, if you have a car loan, your family could sell the car and recoup some cash (assuming your family doesn’t need the car). So, you might not need insurance to cover this debt.
Step 4: Add in college tuition costs
Do you want to help your kids pay for college? If so, it is expensive $$$. But don’t fear – there are steps you can take now to prepare. You can read more on this topic HERE.
If you read that article, you would have read that the average cost of college could double in 9 years. This is why you should consider insuring this cost!
Step 5: Add in your Income Replacement Factor (IRF)
I know… I just used some classic “’finance language.” But I will explain!
What is an IRF and how do you calculate yours?
The IRF calculates the lump sum dollar amount needed to cover your lost salary. If you download my spreadsheet, it is simple to calculate.
In the example above, a parent earned $75,000/year. They need this income for at least 18 years until their youngest child is out of the house and their spouse goes back to work. Inflation averages 3.5% per year (LEAVE THIS NUMBER ALONE!). They expect their family to invest the lump sum and earn 7% per year.
Inflation works against the investment return, so the Real Rate of Return is only 3.38%. (I SUGGEST YOU LEAVE THIS NUMBER ALONE TOO). If you want to change the assumed rate of return, you may adjust it. The Real Rate of Return will automatically recalculate.
So, this parent needs $1,032,785 of insurance to cover the lost income.
The formulas are a bit complex. If you do not use my free spreadsheet, you can consider copying the formulas below. If you use my spreadsheet, you can ignore the formulas
TIP: If there are 2 working parents, you may not need to replace the full $75,000 of lost income. Maybe you would only need $50,000.
Step 6: Subtract your current investment assets
If you already have money saved, you can reduce how much life insurance you need by that amount!
Take a look at my completed table now:
PHEW! We are done! This person should carry $1,009,785 of insurance!
Step 7: Brag to all of your friends that you figured this out! 😊
There is no “easy” way to work through the question of insurance, but there is no better feeling than knowing your family is taken care of!!
Note: There is SO much more to discuss on this topic, but I don’t want to cram it into one blog. There will be more coming!
Second Note: Take my word for it when I say that term insurance is USUALLY a better decision. I will write more on this topic later.
Third Note: Insurance needs are different for everyone. This is a blanket calculation; you should talk to a professional to see if it matches your unique needs.
I realize you might have questions on this topic. Reach out and I will see if I can help!