What is something nobody wants to buy, I hope you never use, but everybody needs? That’s right, life insurance. Just hearing it can give some people chills. Contemplating our own mortality is difficult and it’s often easier to ignore it.
Let’s recall the famous story of “A Christmas Carol”. Imagine being visited by the ghost of Christmas future. You go with the ghost and look in on your family. Are they in the home you live in now? Or did they have to sell the home after you died because they couldn’t afford it without your income? Are the kids studying hard to get into the college of their dreams or are they working to cover their own tuition? You don’t buy life insurance for yourself, you buy it for your loved ones.
Life insurance should be designed to make your family financially whole in the event of your passing. One of the first questions I often hear is “how much coverage do I need”. Two popular strategies are the Liability Driven Method and the Human Value Method.
The Liability Driven Method is probably the easiest to calculate. It’s basically the summation of current debts and future expenses. Think mortgage, college tuition, and funeral expenses. What they add up to is what you would need. If a person were to pass, the family wouldn’t have to sell anything or compromise any big expenses. This number often serves as a good starting point for coverage. There is an obvious gap though in that living expenses are not taken into account.
This brings us to the Human Value Method. In this approach, the present value of a person’s income over a period of years is calculated. This answers the question, how much money would I need today to cover my income if I weren’t around. Your income currently covers the cost of the mortgage, retirement savings, and college planning. It would allow your family to maintain their current lifestyle. This method is a little more complicated to calculate and can sometimes generate an amount to high for many families.
Both of these approaches can help you identify a coverage amount to aim for with life insurance. In my experience, the actual amount of coverage most people need is somewhere in between the Liability Driven Method and the Human Value Method.
There are many different types of policies, each with their own benefits. Some are ideal for business owners, others who are looking to maximize coverage while staying on a budget. Some can even be used as savings and investing vehicles. Working with a CERTIFED FINANCIAL PLANNERTM can help determine this.
Remember, life Insurance isn’t for you, it’s for your family.