Our “Ask a Question” mailbag addresses the question, how much life insurance should I have?
“I recently had a baby, and it is time to buy some life insurance. But, I feel like I am being sold rather than advised. How much life insurance should I have? Lastly, is there a general rule about how much life insurance I should have as part of my estate plan?”
Life Insurance Rules of Thumb.
From years of working with life insurance professionals and wealth advisors, I have come across a few “rules of thumb” about the amount of life insurance a person should own. The most common general rule bantered about is having a policy equal to 10x your salary. For example, if you gross $60,000 a year then you should purchase a $600,000 policy.
Life Doesn’t Often Fall Into a Rule of Thumb.
While a fast rule is helpful, life often doesn’t fall into “quick and easy” rules. Luckily, the factors I will discuss can be addressed and calculated by your insurance professional or your financial advisor. These days there is an app for everything!
Factors to Answer, “How Much Life Insurance Should I Have.”
Life insurance is a tool. You don’t want to use a screwdriver to drive a nail, and you should take the time to make sure the policy you are purchasing is addressing your need. We are all different, but then most of us have similar concerns. In your case, you are examining life insurance do address your child’s arrival. But, are you planning to only address your child’s needs through age 18 at a public high school? Would you like to guarantee there is enough money to pay for college, medical school or a wedding? Is the other parent sharing in these costs, or does the life insurance also have to pay for your spouse’s care?
If you also are concerned with leaving your spouse financially unburdened, then other factors apply. Are their debts you wish paid off? What are your spouse’s income and lifestyle? If you die, will your spouse be able to continue working?
Identify the Concerns, then Calculate the Need.
Once you have defined life insurance’s purpose you have the information for calculating your need. For example, if you want a policy adequate to pay for your child’s four-year college education, but your spouse can provide for the cost of raising the child until age 18, then it is a quick calculation to determine that future cost given your child’s age.
Because you do not purchase life insurance often, you are unfamiliar with the process of identifying your concerns and assigning them value. Therefore, it is important that you find an insurance professional or financial advisor with whom you trust. Ideally, this is a person with whom you can brainstorm. Understandably, you might not yet have sharply focused concerns. Your professional can help determine what is important and what not. Using any one of several existing programs, your professional can then calculate a dollar amount to address your concerns. This number will be much better than any Rule of Thumb.
Document Your Process.
Over the years you should reassess your insurance. Concerns change, and new issues arrive. Keep a file that explains how you arrived at your insurance cost. These notes will refresh your memory and give you a starting point. Then you can add the new information, such as your child’s determination to attend an Ivy League School vs. State College, and determine if more or less insurance is needed.
In conclusion, I would be happy to brainstorm about life insurance needs or any other estate planning issues. How much life insurance should I have is a question with an answer. Feel free to set up a phone conference! Contact our office for a free consultation. We try to make the process as painless as possible!
Wills, Trusts, Probate, and Estate Litigation, It’s All We Do!
Peter Klenk, Esq., LL.M.