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Do I have Enough Life Insurance?

| July 22, 2016
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Life Insurance

When thinking of life insurance, many of you probably say “I already have life insurance through my employer.” This is great and much better than if you didn’t have any coverage, but is the death benefit enough to cover your loved ones in the event you were gone?  In this blog, I am going to cover a few points when contemplating how much life insurance coverage you should own.

I recently spoke with someone who said that exact phrase.  They checked with their employer to determine how much coverage they had, only to find it was $50,000.  Think of your annual expenses and other costs your family would experience after your death, and ask yourself how fare would that life insurance settlement last?  Many of you are probably thinking to yourself, “Not very long.”

Income Replacement

The first thing to consider is, do other people depend on your income?  If the answer is yes, then you will probably need to join this discussion.  The most common use of life insurance is as an income replacement tool.  It can help your loved ones continue their lifestyle without having to make drastic changes to survive on less income.

As an example, let’s say that John Doe makes $50,000 a year and is only 30 years old with a wife and two children.  If he needed to replace his income for the next 30 years, let’s say he buys a term life insurance policy for $1.25 million dollars.  Many of you might be surprised by such a large number.  Let’s say something happens to John and he leaves his wife and children behind with the $1,250,000 term life insurance proceeds.  His wife might invest these proceeds in a blend of investment products that might average a 6% annual return.  They could also establish a 4% annual payout of $50,000, which would replace John’s income.  With our assumed 6% annual return, this would mean that the account would still grow at an annual 2% growth rate, even after the 4% withdrawals, which would allow the income to adjust upwards as the account grows to mirror inflation expectations.  The first year, the wife might get $50,000 in a payout, while the second year she might get $51,000, purely because the account value has grown.  This increase might be similar to John’s wage growth if he were still alive.

Large Expenses

Often an insured person will include large expenses into the calculation to make life easier on the surviving dependents or to simply lower the annual expenses.  These could include paying for children’s future college tuitions, paying for burial costs, or paying off debts such as a home mortgage or car loans.  It is your decision for the type of expenses you would like paid by your life insurance.  These expenses are then added onto the sum that would be replacing your income.

Visit Your Financial Advisor

There are two major advantages to visiting your financial advisor to discuss this topic.  First, an advisor has the option of shopping around to find the cheapest policies.  He could even examine your employer-offered policy to decide if it is worth the cost or if you should terminate it and include that amount in the new policy.  Second, this calculation to find how much insurance is appropriate can be complex.  It would be wise to discuss this with your advisor, to make sure that your needs are all being covered by your current policy.  This is an important topic and it would be smart to make sure you get it right.  Your loved ones are depending on you planning for their future.

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