by Rich Schlueter
 Today, we are asking this question in the context of providing for surviving family members after the death of a wage earner.
Throwing out a range of numbers is a common method among many life insurance sales people for determining how much life insurance you should consider; i.e., you should consider 5-10 times your income or 10-15 times your income. While following this advice will likely put you in a better position than not having acted at all, it doesn’t take into account a holistic analysis of your unique situation. This method of throwing out a range is popular because it does not require the sales person to delve deep into your personal situation.
At Wealth Enhancement Group, we create a basis for a conversation about appropriate amounts of coverage by walking though a formula that determines how much life insurance would be required to replace a certain percentage of the deceased wage earner’s income.
Example:
| |
$75,000 |
Gross income of wage earner |
| multiplied by 75% |
.75 |
Desired income replacement percentage |
| equals |
$56,250 |
75% of wage earner’s income (desired income to survivors) |
| divided by 8% |
.08 |
Gross investment earning rate
|
| equals |
$703,125 |
Asset needed to provide annual income of $56,250
to survivors, assuming an 8% rate of return |
| minus |
$50,000 |
Non-qualified liquid assets |
| minus |
$140,000 |
After-tax qualified plan asset value |
| minus |
$250,000 |
Existing life insurance |
| equals |
$263,125 |
Life insurance shortfall |
In this example, the basis for determining a proper amount of life insurance is an initial shortfall of $263,125. Any of the factors in the formula can be changed, resulting in an alternative basis.
From here, specific objectives can be discussed, such as elimination of mortgage debt, college education funding, etc. The value (cost) of these objectives can then be incorporated into the discussion, resulting in a well-quantified analysis.
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