Talking about getting life insurance can be an uncomfortable conversation. It doesn’t feel urgent when everyone is healthy and day-to-day “to dos” are higher priority. Plus, the complexity of determining exactly who needs it and how much they need can be overwhelming.
Unfortunately, the number of people uninsured or under-insured continues to increase. More and more people forgo life insurance altogether, unsure of where to find reliable information. Financial planners silently cringe to see GoFundMe pages that could have been avoided with a simple life insurance policy… It’s heartbreaking!
So, here’s the scoop. Anyone who has people depending on their income or labor needs insurance. That’s probably you. Particularly if you don’t have enough savings to cover your dependents’ needs (your spouse, your kids).
There is no one-size-fits-all when it comes to getting life insurance. It is important that wage earners AND caregivers (yes caregivers!) BOTH have life insurance. Have I made myself clear??
Below is a simple five-step guide to help estimate the amount of life insurance you need.
Step 1: Evaluate Your Family’s Needs
First, determine how much income and the value of the services you and your spouse contribute to your household on an annual basis. Then, divide that by 5% interest (to determine the amount of money that would generate that amount of income and cost of services, if invested). Do not discount the value of any unpaid household labor. Caring for children, cleaning, laundry, preparing meals, driving children to activities, mowing the lawn, snow blowing the driveway, or fixing things are worth a LOT. Hiring help for this stuff adds up! If the primary caregiver dies, would the primary wage earner keep working, work less, or work at all?
Step 2: Consider Debts & Future Financial Obligations
Next, estimate the total amount of your debts and future financial obligations. This includes the cost of sending your children to college and other long-term financial goals. Also calculate your unpaid mortgage and any other outstanding debts (student loans, car loans, credit cards). While at it, add your funeral expenses (around $10,000 in NH and ME). Add all these factors up and you will have an estimate of the amount of money your survivors will need in the future.
Step 3: Add up Your Resources
Resources should be a sum of all the assets you currently have. Add up your current savings, including any balances in your 401(k)s, IRAs or investment accounts. Remember to add college savings accounts you have set up for your children and emergency cash reserves. If your employer provides any other life insurance policy for you, include that as well.
Step 4: The Calculation
Now that you have a rough estimate of your family’s needs and assets, you can proceed to calculate your life insurance needs. The difference between your family’s resources and needs should give you an estimate of the life insurance you need.
Step 5: Take Action
Term life insurance policies are the simplest, most affordable life insurance option. They make the most sense for most people. However, term policies do not accumulate any cash value (one drawback). You pay a premium for a period of time and a cash benefit is paid to your dependents if you die within that period of time (usually 10 to 30 years). The premium typically stays the same for the life of the policy. It is usually low enough to not be a significant hit to cash flow, and the corresponding death benefit is usually high enough to make the premiums worth it.
A good financial planner (AHEM!) should be able to talk you through this calculation. Additionally, they can connect you to insurance brokers who will oversee underwriting and line you up with a policy. It is usually a simple, painless process …
