I saw this question today on US News and wanted to share. How would you feel if your employer paid you for all your years of service up front—as in 30+ years of service, up front? It’d be life changing wouldn’t it? Now how would you feel if that same boss just paid you one year’s salary for 30+ years of service? How would that affect your family or loved ones? Here’s the deal—it happens every day. Many people I talk to have, give or take, one year’s salary in employer provided life insurance for their loved ones. That’s it. Consider this: if a person makes $50,000 per year, what is the value of that income over 30+ years and more importantly, how much of that income would you want your family to have? One year’s salary doesn’t seem adequate does it?
Estimating Your Need
Admittedly the hardest part of any consultation is working through the proper amount of insurance to own. EVERYONE has an opinion. You could sit down with ten planners and get ten different opinions on how much insurance you should own. So which method is right for you? Let’s work through a sample client together. You put on your adviser’s hat, sit in my chair and estimate the proper amount of coverage for Joe and Jane Client:
- Home mortgage: $201,000
- Number of children: 2, ages 2 and 5.
- College loans: ~$45,000
- Cars: two car loans, ~$22,000
- Credit cards: ~$800
- Combined income: $90,000, his: $50,000; hers: $40,000.
- Life Insurance:
- employer provided life insurance: Joe, $50k; Jane, $25k. Joe also owns a separate policy with $150,000 in death benefit.
- Current savings: $5,000
Two questions for you Mr. or Ms. Adviser: What is the life insurance need here and more importantly, would Joe’s family make it in the event that something happens to him? Do you see what I’m seeing? I’ll get to the need in a moment but if something were to happen to either one of the parents, someone is putting together a GofundMe campaign for this family. Joe, like most people, took out a life insurance policy just for the amount of his mortgage. You may have noticed that the current mortgage is $201,000? That’s because this is the second home Joe and Jane have owned and Joe didn’t think to up his life insurance after the purchase of the second home! By the time Jane has the service for Joe, his family doesn’t even have enough to pay off the house. Even if Jane sold the cars for there current value and purchased a used car, she’s going to be crushed under the other debts that now belong to her. To make matters worse, how long do you think they’ll be able to stay in their home even if it were paid off? If you’re like me, my mortgage isn’t even the largest item in my monthly budget (it’s childcare for most people). Pretty soon, Joe’s family is going to have some very tough decisions to make. There are some who have done a good job in their insurance planning but I see far too many people like Joe and Jane.
You ready for this? $1,300,000 in coverage for Joe and $1,125,000 for Jane. For many of you, I know what your first thought was, “that’s too much!” Bare with me. Your life insurance first and foremost is always a replacement of income. That’s insurance 101. The present value of Joe’s take home pay for the next 25-30 years is ~$825,000. If I add all of Joe’s current debts and tack on $200,000 for college (the average 4 year degree in AL currently costs $100k), that amount comes out to roughly $1.3 Million. In this example, I haven’t over-insured Joe at all believe it or not. Any life insurance company would have insured him for more than this based on his income, family and debts. Some would say that Jane now has benefited from Joe’s passing. That isn’t the case either as all I’ve done is replaced the value of what has been lost. Caveat. Insurance companies will only allow an applicant to indemnify themselves for a loss. They will not insure you to the point to where a beneficiary stands to gain.
It’s Life Insurance Awareness Month. Now, you would probably only know that if you sold insurance. There is a month for everything isn’t there? Seriously, think with me how many times you’ve seen a GofundMe campaign on Facebook recently? I can name three. Now whether or not you agree with me on my recommendation for Joe and Jane. Take a few moments and seriously consider how much you have and how much you need. If you have questions on either of these or on whether or not you’re paying the right amount for your coverage, I’d be glad to help you. For what it’s worth, Joe and Jane didn’t buy the amount I recommended. They each bought $1 Million dollar policies and wanted to pay down debt with the remaining amount. It wasn’t about whether or not I was right. I was far more concerned that a family be taken care of when life happens.