Life Insurance: Crafting Your Legacy
While no two households are the same, I will provide an example that may help you answer this question for your situation. In this example, let’s assume a married husband and wife (both age 40) have two kids ages 3 and 5. Dad makes $65,000 a year and mom works part-time and makes $25,000. They own their home but have $215,000 remaining on the mortgage, owe $20,000 on their vehicles, and owe another $15,000 in student loans. Total debt equals $250,000.
What are their financial goals should one of them not come home that night? If Dad dies will Mom get a full-time job? Will she want to stay in the house? Will she re-marry? Do they want to set up college funds for the kids?
Let’s assume she will stay in the house, remain part-time and will need Dad’s income to continue to pay for their lifestyle. They would also like to fund $50,000 each into the kids’ college accounts and will need $65,000 in income until the kids go off to college. Assuming the mortgage will not be paid off right away but the rest of the debt will be paid, Dad will need close to $825,000 of life insurance. “Holy cow!” you say. “That must be expensive!” Actually, a healthy 40-year-old male can get a 20-year term policy for about $50 a month.
Let’s look at how we arrived at this figure of $825,000 worth of life insurance. The easiest place to start is with the debt that needs to be paid off: $20k on the cars plus $15k in student loans plus $100k for college funds totals $135k. The next step is a little tricky, but stay with me. We should determine how big of a pot of gold we need to generate $65,000 in income for the next 15 years. Using a conservative 5% rate of return for the life of that pot of gold, we calculate (using a present value calculator) that the lump sum needed is roughly $690,000. $690,000 added to the $135,000 equals $825,000.
Not to leave Mom out, but she will need less life insurance than Dad. If we assume the family needs her income and would also like to pay off the debt and fund the college accounts, using similar assumptions as Dad, she will need about $400,000 of life insurance. Mom’s cost for this 20-year term policy will be around $22 a month.
Of course, this is a bit of a simplified example, but I hope that it helps in understanding the needs of life insurance and illustrates not only how you calculate the amount, but also that premiums are probably less expensive than most people originally expect.
Penn Rise Advisors can help you determine the appropriate amount of life insurance and run quotes from more than 20 different insurance companies. Give us a call today to learn more or click HERE to receive quotes.