Life Insurance-How Much?

Posted: Mon Feb 18, 2008 11:40 pm Post Subject:

Short question...No short answer. But in a nutshell...It depends on the income you are trying to protect and for how long.

A simple approach:

Prospect makes $50,000 per year and spouse does not work. No defined pension. Without touching the principal, to generate 50K of income, you need a little over $800,000 (assumes 6% ROR).


Bump the ROR up to 9% and you need about $550,000.

Of course SS and savings may allow you to reduce the face amount a bit.

And then of course...what can they afford? Probably not all WL. Maybe a blend...maybe all term. Depends on the situation.

Wow. No spelling errors. Who needs spellcheck?

Posted: Tue Feb 19, 2008 05:24 am Post Subject:

Great answer Ohio!

Wow. No spelling errors. Who needs spellcheck?

Posted: Tue Feb 19, 2008 05:33 am Post Subject:

Yes, I'd surely agree with Ohio & would also like to say that I'd also take into account the age group of all the members of my family. I'm sure all the carriers would definitely take into account the ages of all insurable-members of my family before deciding upon the costs in case they would be considering a family-floater.
Thanks,
LorryToy

Posted: Tue Feb 19, 2008 06:10 am Post Subject:

As the new Life Insurance Guide, here is the article I'm going to post in that section.

You might be asking yourself this question: "How much life insurance do I need?"





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Posted: Tue Feb 19, 2008 06:13 am Post Subject:

This post has the sparks within to initiate a great discussion. There are many factors contributing towards the decision making of life insurance.

Income, indeed, is the prominent one amongst the factors, but one should also take into account the dependency ratio. If an individual is the sole bread winner of the family, he/she needs to seek more coverage than the fellow with an alternate source of income.

Posted: Tue Feb 19, 2008 01:16 pm Post Subject:

Hi InsInvestigator,

First of all, Congratulations on becoming our new Guide to Life Insurance.

This is an excellent article and I can't wait to see your new Guide section up and running.

Too many people take life insurance for granted and often seem to feel that if they purchase a $100,000 20-year-term policy, everything will be just fine. Very few will actually take the time to determine their life insurance needs and then design a program around those needs.

I know we may disagree at times but I'm glad we're on the same team.

Maze

Posted: Wed Feb 20, 2008 03:58 am Post Subject:

You might be asking yourself this question: "How much life insurance do I need?"

Some financial advisors will tell you to multiply your annual income by seven. Others will tell you to buy only enough life insurance to replace the income you are expected to make between now and retirement. Some might recommend you buy only enough life insurance to cover your present debts.

While you probably can do all of those calculations in a minute, they won't give you the right answer. Simply put, calculating your life insurance needs takes a little homework. It requires you to do an inventory of all of your finances, and to think long and hard about how your beneficiaries would maintain their lifestyles without you. You also must consider inflation and, if you have children, future college education costs.

What not to do

What's the wrong way to calculate how much life insurance you need? Here are some common but misguided methods.

1. Multiply your annual salary by seven or eight: While it's a simple formula, it fails to take into account your individual needs and obligations. Life insurance experts say there's a good chance you'll buy too little or too much coverage, simply by using a formula such as this.

2. Calculate your "human life value:" This method gives you the income you will earn from your present age until your retirement age, assuming a rate of interest that represents salary increases throughout that period. The problem is it does not take into account what your beneficiary's specific needs will be. You also end up with a figure that requires you to buy a huge amount of life insurance, possibly more than you may need. There's all sorts of landmines in this method. When you calculate this way, you're working with broad brush strokes.

3. Cover your debts. This involves buying only enough life insurance to cover debts such as your mortgage, student loan bills, or outstanding car notes. This method does not consider any future debts or needs, such as childcare or college education costs.

A classic formula

I've advised my clients that the best way to pinpoint a smart life insurance figure is through a financial needs analysis, which can be broken down into a simple formula: Short-term needs + long-term needs - resources = how much life insurance you need. Most insurance experts say that this method is "probably the most accurate approach in what is an inaccurate and imprecise science."

I always advise my clients to do an analysis at least once every three years, or whenever they have had a major life change. For example, if they have a new baby, they have to recalculate college education needs and child-care costs. If they own a home, a mortgage is likely the biggest financial burden. Because their mortgage balance decreases with each payment, it's important to include those revised figures in the calculations.

Five steps to a needs analysis

Step 1
Add up all of your short-term needs. These can be placed into three categories: final expenses, outstanding debts and emergency expenses. Among final expenses are medical, hospital, and funeral expenses, attorney or executor fees, probate court costs (if you do not have a will), and any outstanding taxes that would need to be paid if you died. Among outstanding debts are credit card balances, auto loans, college loans, and all other outstanding bills. Emergency expenses should include a cash reserve for medical emergencies and repairs to your home or car.

Calculating final and emergency expenses can be complicated, because you don't have a crystal ball that tells you how much your medical or hospital expenses will be, or if you even will have any.

Step 2
Next, add up your long-term debts, which include your mortgage and college tuition.

Calculating an education fund is tricky because you have no idea where your children will be going to college. Perhaps the best method is to use the present average college cost in the United States and the number of years away your children are from entering college. The average college costs for the 2002-2003 school year were $4,081 annually for a public, four-year institution, and $18,273 annually for a private, four-year institution, according to The College Board.

The U.S. Department of Education reports college costs traditionally have risen at about 5 percent annually, so you need to figure out what the cost will be when your child goes to college. (To calculate what costs will be in the future, see the last section: “A must-know: the equation for the future value of money.” Also be sure to calculate what the entire education will cost while taking into account the increased costs each year.)

Step 3
Next, calculate family maintenance expenses. These include such necessities as childcare, food, clothing, utility bills, entertainment, travel, and transportation. Calculate this figure based on a year's worth of expenses, then multiply that times the number of years you want to provide this income. Once you've done that, add your short and long-term debts and your family maintenance expenses.

Step 4
Now that you've calculated all of your income needs, figure out what resources you have to meet them. To do this, add all available savings, stocks, bonds, mutual funds, existing life insurance (such as group life through your employer), and Social Security. You and your spouse can find out how much you'll get through the Social Security Administration (SSA) by visiting the SSA's website, where you can get an estimate of how much you should have in Social Security benefits. Also add your present salary, and assume 5 percent compounded interest each year if you expect salary increases over time.

It's important to count only liquid assets (those that could be quickly converted to cash) among your resources. You shouldn't count items such as your home or automobile, because selling them for cash when you're gone would mean changing your family's lifestyle.

Step 5
Subtract your resources from your total expenses. The figure you get should represent the amount of life insurance you should buy.

Don't be discouraged. The final figure that shows how much life insurance you might need can often be staggering. If you end up with an astronomical figure that requires a premium that is too high, I recommend you go through the analysis again and select areas for which you think you can allocate less money.

Many people will look at the final figure and say, "I can't do that." You have to look at it, figure out which is the most crucial, start making adjustments, and go from there.

A must-know: the equation for the future value of money

Calculating your life insurance needs will require two equations you may have picked up in Finance 101: the future and present value of money.

The future value of money equation tells you how much your money will be worth in a given number of years while earning a given rate of interest. This equation is essential if you are calculating how much money you'll need in the future because of inflation, or what your death benefit will be if you choose to invest the money at a given interest rate.

The present value of money equation tells you what your money is worth before it has been invested for a given number of years at a given rate of interest. This is important if you have an amount of money you need in the future, and you need to know how much life insurance coverage you should buy now.

If this sounds complex to you, don't fret. As long as you have a calculator (preferably a financial calculator, which is used by accountants and finance professionals), these equations are no sweat.

Here's how the future value of money equation works: Say that average college education costs are $20,000 annually for a private four-year institution, and you want to figure out how much it will cost in four years if college costs keep going up 5 percent per year. You would multiply 20,000 by 1.05 (1 represents the present cost, and .05 is 5 percent inflation) four times (or 1.05 to the fourth power).

So your equation would be this:

20,000 x (1.05)4
or
20,000 x (1.05)(1.05)(1.05)(1.05)
The answer is $24,310.13.

Please note that this description/explanation is intended only as a guideline.

Posted: Wed Feb 20, 2008 03:13 pm Post Subject:

Hi Diem,

Driving with a DUI in your recent past will definitely increase the likelihood of your being turned down for life insurance.

The reason being that people with poor driving records, especially a DUI, may be a higher risk for life insurance considerations.

There are many deaths each year resulting from driving accidents, and a great many of those deaths result from drunken driving accidents.

A DUI indicates that you are a higher risk for life insurance, and you stand a greater chance of death due to your driving record. That results in your either being turned down for life insurance, or receiving much higher quotes for life insurance.

You may want to visit a life insurance quote provider online (such as efinancial) and see if you can get a quote for life insurance. By visiting a life insurance quoting service online you may stand a chance at getting a quote from one of the insurance companies in the network of carriers offered.

Some carriers may not accept people with a DUI in the last 2-5 years, or those with more than one DUI.

Posted: Wed Feb 20, 2008 05:29 pm Post Subject:

Hello Diem,
I thank you very much for the kind words and support.

Multiple or very recent DWI or DUI convictions, even without any other indicators that alcohol use is affecting your life, generally will lead to you being charged a "flat extra" premium, in addition to your regular life insurance premium, for a number of years. Temporary flat extra premiums will automatically disappear two to five years from the date of a DWI/DUI conviction.

Your claim of being "turned away" surprises me, as this isn't usually "the norm."

If you have any more questions, feel free to send me a message.