How much Life Insurance do you need?

The goal of insurance is to equalize one's living standard across good and bad times. It means making premium payments during the good times, when the house hasn't burned down or the primary wage earner hasn't died, so as to receive a significant amount of money in the bad times, when these events happen.

None of us buys fire insurance for five times the value of our house, and the same logic should apply to life insurance. The difference is that valuing a life is a very complex task. The amount of life insurance a person needs will vary with age and family situation - for example, more life insurance will be needed if the kids are going to college than if they are not. The calculation of the correct amount of life insurance a person needs is often not done. Instead, most people buy an amount they think is appropriate compared with what they think they should be spending. In short, most people will either have too much or too little at any one point in time. Does it have to be this way?

The answer is 'NO!' The calculation should be included as part of a plan that also determines how much you should be saving to maintain a constant living standard in retirement. The amount of life insurance you need is matched to that same living standard number. Once the amount is known for the coming years, it becomes possible to implement the necessary coverage using inexpensive term insurance of differing periods. If desired, an underlying constant amount of insurance might be addressed using whole life or Universal life insurance, to add a tax-deferred savings component. This is the most efficient and lowest cost way to properly address the issue of mortality risk.

The problem is to find someone able to do this calculation. Just as the investment houses want you to save and invest the maximum amount with them and have calculation methods that encourage this, the insurance industry wants you to have a generous amount of coverage. Their agents are usually paid on commission, so their compensation is aligned with this goal. In reaction to this obvious bias, most people become guarded and defensive in considering their purchase. What suffers from this dynamic is the concept of buying the 'right' amount of insurance.

We perform the life insurance calculation for you as part of your retirement plan, call (408) 725-7135 to schedule an appointment or click here for more free information.

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