Bring up the term life insurance to just about anyone NOT in the insurance business and you’re bound to have some sort of joke/movie quote come up about America’s favorite life insurance salesman, Ned Ryerson. Bing! Of course, the movie tries to typify what a life insurance salesman will do – prey on ANYONE they even remotely know and try to tell them that the catastrophic COULD happen to them so they should buy plenty of life insurance.
Of course, talk to anyone IN the insurance business and they’ll tell you that life insurance is more than a punch line. Talk to an insurance agent that’s actually delivered a death benefit check to a widow/er or children and they’ll tell you that it can sometimes mean the difference between losing some precious memories of a loved one and not losing those memories.
Listing reasons to purchase life insurance will be saved for another blog. This blog is going to focus on how to figure what your death benefit should be assuming you’ve already decided that purchasing life insurance is a prudent choice.
Basically, there are 3 different ways to figure out what your death benefit should be. We’ll talk about each one, listed below:
1. The “total needs” approach. This approach is probably the one most widely used, and is also the one that is the most time-intensive. The total needs approach will attempt to designate a proper dollar amount to each of the following “needs”:
a. Dependent Children. How old is each child, subtract from the age you plan on not supporting them anymore, and multiply by the dollars per year that they’ll need to survive. (Example: You’re planning on their independency at 21, they’re currently 13, and they roughly cost $20,000 per year, so plan on 8x$20,000=$160,000 for that child).
b. Grieving Spouse. If your spouse doesn’t work or simply relies on your income to survive, you won’t want them to hit the classifieds 5 minutes after your funeral is over. This will take into account time the grieving spouse will need to get through an emotional time.
c. Mortgage. How much do you owe on your house? Better figure it into your death benefit.
d. Income for parents. You may not outlive your parents, but they may be relying on you for support as they age – do you need to prepare?
e. Blackout periods. This has to do with social security. The blackout period is the length of time between your spouse receiving social security benefits for a minor and the time they can receive benefits themselves. Sometimes this blackout period can last for 10 years or more.
f. Last expenses. My dad always said you want the last check you ever write to bounce. Unfortunately, Uncle Sam, the funeral director, and your family wouldn’t find that joke funny.
The great thing about the total needs approach is that it can be extremely accurate. The downside of this approach is that it can yield a death benefit number that you can’t afford, and it takes time to come up with the final number.
2. The “multiple of earnings” approach. This one is easier to figure, because it doesn’t look at all the things the total needs approach addresses. You simply take your gross earnings and multiply it by a number you feel comfortable with, such as 5 or 10. Example: You make $100,000, multiplied by 10 – your death benefit should be $1,000,000. This isn’t nearly as accurate, but it is very simple.
3. The “Scientific Guess” approach. Even easier than the multiple of earnings approach, this is simply a number you “feel good” about. There’s really nothing scientific about it.
And there you have it. Next time you meet with Ned Ryerson, ask him which way he would go. And as always, we’re always happy to walk you through these steps to find out if your life insurance covers you adequately.