The Dollars and "Sense" of Protection

How much money do you spend to protect your valuables or other tangible assets? Most people understand the importance of automobile insurance, homeowners insurance, and additional coverage for items or collections of significant value. While tangible assets such as cars, homes, and jewelry may be worth a lot, their income-producing value is often negligible. In this respect, your true wealth, and perhaps your greatest asset, is your future earnings potential.

If you are your family’s main provider, without you, your family may not have a home they can call their own, an adequate retirement nest egg for your spouse, an education funding plan for your children, or enough money to maintain their current lifestyle. So, while you may be comfortable with the insurance coverage you have in place for your most important tangible assets, can you honestly say the same about the insurance coverage that’s in place on something a little less tangible—namely you? With this in mind, let’s take a closer look at how you can estimate the financial loss to your family if you should die.

Let’s look at an example. Suppose you are 35 years old and earn $50,000 per year. You currently have $100,000 of life insurance coverage. You and your spouse have calculated that you’ll need to work for 30 more years in order to meet your financial goals and objectives—paying off your mortgage, sending your children to college, and having adequate retirement savings. If you multiply your current earnings by 30, you get a very rough estimate of your future earnings—$1,500,000.

Don’t let this figure startle you. It’s not how much life insurance you need. There are a number of factors that must be taken into account if you want to objectively determine the amount of coverage you need. Along with the loss of income, the death of a breadwinner will also eliminate some routine personal expenses that can certainly add up over time. In addition, federal and state income taxes must also be subtracted, since they’ll no longer be due. Finally, you’ll have to factor in any increases in future earnings.

Assuming an income of $50,000, Federal and state taxes of 34%, a 15% discount for future personal expenses, a 3% annual salary increase, and a 6% return on future earnings (net present value), you’re worth $520,000! Now, subtract your existing life insurance coverage of $100,000 from $520,000, and you end up with $420,000. Remember, this is just an estimate of the potential financial loss your family would suffer if you were to die today. Do you know where your family would get the money to replace this stream of income?

Before you crunch the numbers, it is important to realize that determining life insurance needs is not as simple as it may appear. There are many factors and calculations that must be taken into consideration in order to objectively assess your needs. Therefore, it is important to consult with a qualified insurance professional to help ensure you secure the right coverage.

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