by Timothy Pitcher
How much is enough? This is one of the most frequently asked questions that I receive from my clients when discussing life insurance. For years, the standard response was ten times your annual salary. Unfortunately, that "one size fits all" mentality doesn't always work. That formula may be sufficient for some individuals, too much for others, and not enough for some.
In almost nine years in the life and health insurance industry, I have found that arguably the best method is the "Cash+One+Half" method. It really is a simple method.
The "cash" refers to the amount of debt that an individual carries. In other words, it is the cash needed to meet all the debt obligations at death. This includes a mortgage, car payments, installment loans for college education, creditors, etc.
The "one" refers to one-year annual salary (after taxes). The thought process is that you would want the surviving spouse to live off the same income for (at least) one year during a transitional period.
The "half" refers to half the annual salary of the deceased spouse until the youngest child reaches age 18 or until they graduate college. Simply add up that amount and subtract the existing amount of life insurance in force. At that point, I can make a recommendation for my client. Using this method, I customize a proposal for my client based on their financial situation and not on what an insurance carrier might feel is necessary. The beauty of this method is that it can be adjusted for any situation. It can be adjusted for business owners with or without partners, couples without children, one or two income households, single parents and many more variables. If the surviving spouse has a secure career creating a high enough income, the "half" portion can be lowered since the family would not have to live on the same income with all debt obligations met. Therein lies the beauty and simplicity of this method. It literally allows a family to customize an affordable life insurance plan for them with annual reviews to update any changes.
Keep in mind that Social Security pays a death benefit of $255 to the surviving spouse. Furthermore, a surviving spouse may be entitled to a monthly benefit based on the full retirement benefits of the deceased spouse provided the surviving spouse has a child under age 16 (or 22, if disabled) and the child was a dependent of the deceased worker.
Many people fail to recognize the significance of life insurance. Life insurance helps to keep a roof over the family's head, to ease the financial strain of a death, to provide for a college education, and to keep food on the table. Most households have dual incomes, and the loss of one income can devastate the family. Could you make all your payments if tomorrow you lost 25%, 50% or 70% of the household income? Probably not.
One final thought on determining how much life insurance is enough concerns women. There are more career women now than in any time in our country's history. Many women are the primary breadwinners (that is true in our household), and the loss of her income would significantly impact the family. A working woman should have the same amount of coverage as her working spouse. Quite often, this is not the case.
Timothy Pitcher is the Past President, Legislative Chair of the Sarasota/Bradenton, FL chapter of National Association of Health Underwriters, Membership Director of the Sarasota chapter of the National Association of Insurance and Financial Advisors, and Chairperson for the Local Association of Health Insurance Advisors. You can reach Mr. Pitcher at tjpitcher@comca st.net.
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