I’ve seen enough murder mysteries for my gut reaction to be, “Enough so your family won’t need to sell the house, drop out of high school, and move to van down by the river; But not so much they are happy to see you in the casket, or worse, conspire to put you there.” While I offer this tongue-in-cheek, it actually starts a dialogue for discussing your true needs, a minimum and maximum amount.
Let’s start with the biggest expenses many of us are up against, our house and funding college for our children. If your kids are already adults, your spouse may not want to keep the house after you pass. If you still have school age children, or your spouse will stay in the house, it would be a great start to have that mortgage paid in full with the life insurance proceeds. Term life’s coverage will remain the same for the duration of the term, but you’ll be making mortgage payments, so will have less need for the mortgage-targeted portion of the insurance. This factor will help offset inflation a bit over that term. You are likely saving for your children’s college tuition, and should account for this as well. From College Data, “According to the College Board, the average cost of tuition and fees for the 2012–2013 school year was $29,056 at private colleges, $8,655 for state residents at public colleges, and $21,706 for out-of-state residents attending public universities.” This is more than a three to one range from state school to private. It’s okay to estimate on the high side and find you have a bit extra. So far, these two costs might range from a low of $100K, up to $500K or more. Medical school anyone?
Next comes the real math. How much is your income that insurance will need to replace? Financial authors still tend toward the 4% rule, suggesting that you can withdraw 4% of a nest egg each year, adjust for inflation, and have a good chance of not running out of money. This means that for every $10K you make, $250K in life insurance is required to replace that stream of income. For a $40K/yr income, $1 million is needed. Of course, one doesn’t live off their gross income, but rather their net. This is what’s left after Social Security, Taxes, Retirement Savings, etc. That’s why this math is not an exact science, but rather, a starting point for how to determine your insurance needs.
Once you have a number in mind, it’s time to start shopping. Are you in good shape, physically? Do you smoke? (Gee, I hope not!) Do you have any pre-existing conditions that might make you seek to find life insurance without a medical exam? These are among the things to consider when shopping for your policy. On a personal note, we bought our policies 15 years ago when our daughter was born. After the terms came up for renewal, we stuck to the same value policies, as our college savings and mortgage payoff needs dropped, but inflation make up the difference. In five years, the mortgage will be gone, and the college bills will at least be a known quantity. And it’s fair to say that most days, my wife prefers me to the bundle of cash she’d get if I passed on.