There is a right way and a wrong way to calculate how much life insurance you need. First, let’s look at the wrong way.
The typical life insurance agent will steer you toward cash value life insurance of some sort. It might be called:
…or some other fancy name.
We recommend that you ask any agent, right up front…if the product he’s trying to sell you is term or cash value. Reject the cash value insurance.
Cash value agent will customarily ask you how much money you can afford in your budget for life insurance. Once you tell them how much you can afford, they will calculate how much cash value insurance he can sell you for that amount of money.
That is completely backwards, and has nothing to do with your needs.
Here is the right way.
Q: How do I determine the amount of life insurance I need?
A: It depends on what you are trying to protect.
Family protection: the most common reason for life insurance
Discussing your life insurance needs is a vital and necessary conversation. But remember, it can be fraught with emotion. You are making plans how to live after the death of someone you love dearly. So, be sensitive to each other as you progress. Show your love through your good planning.
Life insurance is actually income protection insurance. If you are alive and earning an income, life goes on. If you die, your income stops. But if you are part of a family, the surviving members of the family may still need your income for a certain period of time.
In a family situation, the main income earner should be the person with the most insurance. The second income earner should also be insured against loss of income.
Think about this: A person who worked a normal 40-year working lifetime and averaged $50,000 per year will earn $2 million in his lifetime. Sounds like a lot of money, and it is. But you won’t feel like a millionaire on the yearly plan.
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Let’s show an example of the typical family of four. Dad is the main income earner, Mom also works outside the home but earns less than Dad. They have two children, ages 4 and 6. Dad and Mom are both 30 years old. Dad earns $50,000 per year, and Mom earns $30,000.
If Dad died today, Mom and the kids would still need his income until the youngest child is grown up. We traditionally figure that kids are out of the house at 22, or after their senior year of college.
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