If you’re like most people, you’ve worked hard over the years to accumulate assets and achieve your family’s current standard of living. As a result, you probably take important steps to protect your valuables and other tangible assets. Certainly, most people understand the value of automobile insurance, homeowners insurance, and additional insurance coverage for items or collections of significant value. While tangible assets such as cars, homes, and jewelry may be worth a considerable amount of money, their income-producing value is often negligible. In this respect, your true wealth, and perhaps your greatest asset, is your future earnings potential.
If you are your family’s main provider, your family may depend on you to make mortgage payments, save for retirement, and fund your children’s education, in addition to maintaining your current lifestyle. While you may be comfortable with the insurance coverage you have in place for your most important tangible assets, have you considered the amount of insurance coverage you have in place for something a little less tangible—namely you? With this in mind, let’s take a closer look at how you can estimate the financial needs of your family in the event of your death.
Estimating Financial Needs
Suppose you are 35 years old, earn $50,000 per year, and have $100,000 of life insurance coverage. In addition, you and your spouse have calculated that you’ll need to work for 30 more years to meet your financial goals and objectives, which include paying off your mortgage, sending your children to college, and building adequate retirement savings. If you multiply your current
earnings by 30, you get a very rough estimate of your future earnings—$1,500,000.
Don’t let this figure startle you. It’s not how much life insurance you need. There are a number of factors that must be taken into account to objectively determine the amount of coverage you need. Along with the loss of income, the death of a breadwinner may also eliminate some routine personal expenses that can add up over time. In addition, Federal and state income taxes must also be subtracted, since they’ll no longer be due. Finally, you’ll have to factor in any increases in future earnings.
Assuming an income of $50,000, Federal and state taxes of 34%, a 15% discount for future personal expenses, a 3% annual salary increase, and a 6% return on future earnings (net present value), this value changes to $520,000! Now, subtract your existing life insurance coverage of $100,000 from $520,000, and you end up with $420,000. Remember, this figure is just an estimate of the potential financial needs of your family if you were to die unexpectedly today.
Before you start crunching the numbers, it is important to realize there are many factors and calculations that must be taken into consideration to objectively determine your needs. Therefore, it is important to consult with a qualified insurance professional who can work with you to ensure that you have the necessary coverage. $