Which Life Insurance Needs Approach Is Best?
There are a few ways that you can calculate the correct amount of life insurance that you should buy. Some of these methods take a simplistic approach, while others require a more involved analysis of your current and future financial situation. In this article I will explain several of the methods that can be used to determine your life insurance needs, but a good starting point is to use my life insurance needs calculator. This calculator will give you a general idea of how much life insurance you should consider based on the inputs that you provide. Keep in mind that this calculator cannot account for all financial considerations, and you should only use the results as a general guide. Make sure to discuss the results with your advisor before you begin an application for a policy.
The Multiple of Income Approach
The multiple of income approach is the simplest method of estimating the amount of life insurance coverage that you need. It is also the method used by many of the "financial gurus" when they discuss life insurance on their television and radio talk shows. Dave Ramsey, for example, suggests buying " term life insurance coverage of about 10 to 12 times their annual income". This means that for someone earning $50,000 per year, they should consider $500,000 to $600,000 of life insurance protection. I won't quibble with Dave's advice here. It's not bad advice, although I will caution you that this should only be a starting point. Generic advice like this is generally good for repeating over and over again on talk shows, but it might not be the right advice for you. There may be many other factors that impact your needs, so you might need considerably more (or less) life insurance coverage. Proceed with caution if you use this approach, and be sure to have a conversation with your advisor if you have questions. The idea behind the multiple of income approach is the same as for the capital needs approach. Essentially, these methods try to estimate the amount of money (capital) that will be required to replace your income in the event that something happens to you. Which life insurance needs approach is best? Call us, we can help.
The Human Life Value Approach
The human life value approach tries to assess your financial value to your family and those you love by estimating the financial loss they would suffer if you were to die today. In simple terms, the human life value (HLV) approach calculates the total value of the income you are likely to earn over your lifetime and subtracts the total value of the expenses that come from your consumption. The result of this calculation is your human life value. Here is an example: John is 40 years old and earns $100,000 per year after taxes. He plans to work until age 65. This means that John will earn $100,000 x 25 years = $2,500,000 through the rest of his working years. He estimates that he spends $30,000 per year on his expenses (automobile, clothing, food, etc.). This means that his expenses over his remaining working years will total $30,000 x 25 years = $750,000. Taking the $2,500,000 total income and subtracting the $750,000 of total expenses, we are left with $1,750,000 as John's human life value. (The example I provided above is very basic, and doesn't include inflation, additional income that John might have earned from promotions, etc. A human life value calculator can take into account these details and provide a more accurate figure.) The HLV approach should, like the multiple of income method, be used only as a starting point in determining your life insurance needs.
The Capital Needs Approach
The capital needs approach is probably the best way to determine how much life insurance you need. This method takes into consideration a number of factors to determine the "right" amount of insurance for your needs. You can think of this approach as the more sophisticated cousin or the multiple of income approach. Done correctly, a capital needs analysis will take into account your current income and expenses, your current assets and liabilities, your current tax rates, expected future increases in income, inflation, etc. The best and easiest way to do a capital needs approach is to use our calculator or to just call us and let us do it for you. We have the software needed to do it quickly and accurately.
The Best Life Insurance Needs Approach
The best approach is the one that helps you accurately determine how much life insurance coverage to buy, without over or underestimating the amount that you really need. For help with the process, feel free to give me a call. I'll walk you through the process and help you get the right policy for your needs in an efficient, no-nonsense way. You can reach me at (877) 883-3561.