How much life insurance should a person own?I have heard some experts say the amount should be four, six, or even seven times a person’s annual salary.
“In the aftermath of the World Trade Center tragedy of Sept. 11, 2001, countless Americans are re-evaluating their life insurance portfolios. Many people are taking a hard look at their coverage and asking themselves whether they are adequately protected. They are seeking guidance in determining exactly how much is required to sufficiently provide for their loved ones if they were to die.”
The amount depends largely on a person’s individual circumstances. No two persons have exactly the same needs. You may be single. Or, you and your spouse may be supporting several children or an elderly mother or father. Whatever your situation, if you are providing financial support for dependents, you need an adequate amount of life insurance. Life insurance provides financial security, ensuring that when you die your family will have the financial resources it needs. However, life insurance also may be used to meet a variety of long-term financial planning goals. It can help provide educational funds for your children or funds for your own retirement. It also can be used in business situations to fund buy/sell agreements and employer-sponsored benefit plans.
When reviewing the amount of life insurance you own or need, there is one question you should ask your agent: “What is my economic life value?” In wrongful death cases, the courts have ruled that the amount a family receives in the event of a member’s death must be sufficient to replace what the person’s future net contributions would have been. If you were to die, your family would lose this contribution. For many years, economists have testified in wrongful death cases regarding the net economic loss to the family. They determine the loss by projecting earnings, fringe benefits, and household services. Then, they subtract taxes and consumption.
HUMAN LIFE VALUE is an approach to determine a persons’ capitalized earning capacity over his or her lifetime. Although everyone is unique and irreplaceable, “each human life potentially has an economic value, which is derived from its earning capacity and the financial dependency of other lives on that earning capacity – Human Life Value is the present capitalized value of a person’s net future earnings after subtracting self-maintenance costs, income taxes and life insurance premiums being paid.
To practically apply this concept, let us take an example. A 35 year old whose gross earnings are $100,000 annually, and let us assume he will work until retirement, 30 years. He has an annual expectation of growth of his earnings at 5%, and assumed he can earn 4% on any immediate or long term investment. His Human Life Value would compute to $3,518,987. This is the amount you would need today, with interest earnings, to replace your projected income until retirement.
Here is a checklist from the American Council of Life Insurance that points out where funds may be needed in the future:
• Ready cash for final expenses. These may include funeral costs, medical expenses, probate fees, and estate taxes.
• Money to pay off outstanding debts – not only hospital bills, but a mortgage or an auto loan.
• Replacement income in amounts necessary to cover a readjustment period of two or three years after your death. (If you are a two-income family, it takes time to adjust to one paycheck instead of two. If you are the sole wage earner, with young children at home, your spouse’s need for a readjustment period is obvious.)
• Funds for the period while children under age eighteen are still at home and dependent. (Social Security benefits that may be available supply only part of your family’s income needs.)
• Funds for the college years, when Social Security benefits for dependents end just as expenses grow.
• Income for years between the time the youngest child becomes independent and the time the surviving spouse reaches retirement age.
• Income for the period after the survivor retires and receives Social Security or a pension.
In general, determining how much life insurance you need means deducting the sum total of the income that would be lost upon the insured’s death from the sum total of your family’s ongoing financial need. It also means calculating the impact of inflation and building in enough “extra” to counteract inflation’s effects.
It may seem complicated, but you do not have to tackle this alone. A life insurance agent can help determine how much life insurance your family will need today and in the future.
Corporate Strategies, Inc.
16255 Ventura Blvd., #320
Encino, CA 91436
Toll Free: 800-914-3564