The average American has $50,000 of life insurance through work, which equals about $250 per month in income replacement. Are you that average American? Can your family survive on $250 each month?
Many income earners think, “Life insurance doesn’t fit into my budget. Life insurance is expensive. I don’t need it.” However, your family cannot afford for you not to have it.
If you were to die tomorrow, your family will live off the assets you leave behind. The goal is to continue the standard of living which was in place prior to your death. What are your assets? What should you have?
Assets x Rate of Return = Income Replacement
1) Assets = 401ks, cash savings, stocks and bonds, cash value in second vehicle which can be sold, existing life insurance
2) Rate of Return = return on your investment. 10% was a normal rate of return 10 years ago. Lately, it’s much lower. What rate of return makes you comfortable? 5%? 7%? 10%?
3) Income Replacement = 80% of your annual income. Typically, you deduct 20% for personal expenses like clothes, extracurricular activities, eating out, etc.
Consider this example:
Ben makes $75,000 per year. Ben's spouse stays at home caring for their children. Should Ben pass away, Ben's spouse and kids would need $60,000 in income replacement. This means Ben needs about $850,000 invested at 7% rate of return to provide his family with $60,000 in income replacement.
At the time of Ben’s death, Ben had one year’s salary as his life insurance benefit ($75,000). He also had $100,000 in his 401k and $5,000 in cash value on his car. This means Ben left his family with $180,000 which gives his family $12,600/year* in income replacement.
Ben’s spouse needs to go back to work because she doesn’t have adequate income replacement. She needs to pay for before- and after-school daycare. She may need to pay for health insurance. She needs an income to provide food, clothing, and activity fees for her children. Down the line, as the kids grow there will be additional expenses and she wants to help pay for the kids' college education.
Because Ben had no life insurance, Ben’s wife’s and kids’ financial lives have changed drastically.
In order to adequately provide for his family, Ben needed to buy $670,000 in additional life insurance to supplement his assets.
How much life insurance do you need to supplement your assets? Contact a licensed insurance agent to find out.
*This does not take into account inflation, social security, or survivorship benefits.