Ed Hinerman On Life Insurance

How Much Life Insurance Is Enough??

August 3rd, 2007

Again, referring back to yesterdays post on the Top 5 reasons people don’t buy life insurance when they know they need it, one of the questions I left unanswered was difficulty deciding how much to buy.

Well, back in the days of high interest income, it was simple. The standard answer was 10 times your annual income. The logic was that your spouse could put the death benefit into an interest bearing investment that would produce 10% or more and they could then withdraw an amount equal to the lost income every year and leave the principal amount intact for other purposes. Pretty simple and it actually made sense at one point.

Needless to say, long gone are the days of 10%+ guaranteed after tax returns on investments. There are several different calulators and methods out there. Here is a common method using income replacement alone.

Insurance Calculator

Annual replacement income needed if the insured dies prematurely (before tax):	10000 15000 20000 25000 30000 35000 40000 45000 50000 55000 60000 65000 70000 75000 80000 85000 90000 95000 100000 110000 120000 130000 140000 150000 160000 170000 180000 190000 200000 225000 250000 275000 300000 325000 350000 375000 400000 425000 450000 475000 500000 750000 1000000
Number of years a replacement income is needed by dependents/beneficiaries:	5 10 15 20 25 30 35 40
Estimate the average annual interest rate that you can earn on the invested life insurance proceeds:	4 % 5 % 6 % 7 % 8 % 9 % 10 % 12 %
Estimate the average annual inflation rate:	2 % 3 % 4 % 5 % 6 % 7 % 8 %
The amount of life insurance needed to replace the annual income is:

Using this type of calculator can at least give you a basic idea of pure income replacment. What it doesn’t do, that an independent agent can help you do is determine how other assets can offset part of the long term need for insurance. When you factor in other assets it can drive down the cost of insurance. It also begins to make clearer the need and logic of staggering your life insurance coverage.

Bottom line. Determining the amount of insurance is not an exact science, but there are plenty of tools out there that can help. Just make sure you look in all of the corners for offsetting assets before you give your final answer.

Related Posts

• May Old Assumptions Be Forgot!
• Different Times Require A Different Plan!
• Is There A Limit To How Much Life Insurance You Can Buy?
• Why term life insurance? What to think about!
• The Facts Of Life!!

Entry Filed under: Independent agent, insurance, life insurance