by Richard Schlueter, Vice President – Insurance Services, Wealth Enhancement Group
Throwing out a range of numbers is a common method among many life insurance salespeople for determining how much life insurance you should consider: You should consider 5-10 times your income or 10-15 times your income, for example. 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 approach of throwing out a range is popular because it does not require the salesperson 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 a deceased wage earner’s income.
Example:
| |
$75,000 |
Gross income of wage earner |
| multiplied by 75% |
0.75 |
Desired income replacement percentage |
| equals |
$56,250 |
75% of wage earner’s income (desired income to survivors) |
| divided by 8% |
0.08 |
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 an appropriate 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 are discussed, such as elimination of mortgage debt, college education funding, and so on. The value (cost) of these objectives can then be incorporated into the equation, resulting in a well-quantified analysis.
This is a hypothetical example and is not representative of any specific situation. Your results will vary. |
