Life Insurance: How Much Do You Really Need?

The fear of death follows from the fear of life. A man who lives fully is prepared to die at any time.   Mark Twain

There is a great deal to take away from this quote by Mark Twain. I concur with his sentiment. However, dying at any time presents an unacceptable financial risk to survivors unless the deceased is fully insured for life insurance.

The risk of a pre-mature death is a catastrophic failure of one’s dreams and goals. In today’s society, individuals ‘mortgage’ [French word meaning payable unto death] their futures by borrowing against their potential wages. The result of an untimely death is that the bills all come due at a most inopportune time.Many who have attended my classes over the years have collected ‘Tillery-isms’ regarding life insurance. I would like to review two of them for this posting: term rhymes with burn; regardless of the math, everyone needs 5 – 7 times annual earnings as a life insurance death benefit.

Term rhymes with burn has more to do with the income tax benefits afforded life insurance than any vendetta against term insurance. And yes, there is a need for term insurance—rarely, but there is a need. It should be used for those individuals whose budgets are so out of control that they are unable to afford permanent life insurance, or the need is truly temporary. Permanent / cash value life insurance is an excellent forced systematic program of savings. The values of the contract grow income tax deferred and may be accessed on a FIFO tax basis [First in First out]. Additionally, life insurance cash values in the United States are wholly assignable and are an excellent source of collateral when necessary.

How much life insurance does someone really need? There are a variety of ways to calculate the need: human life value; capital retention and capital depletion. For thirty years I have worked the math on hundreds of clients and the numbers always come out the same: an individual needs between 5 to 7 times their annual income as a death benefit. I still ponder why this is the case; but I still do not have an answer.

The life insurance death benefit typically pays off debt and provides for survivor income. Logic would say, the amount you are able to borrow [mortgage against earnings] is dependent on one’s income. An individual’s financial hopes and dreams are based on their ability to barter their time for wages. And to barter their future time as well, which is why everyone needs life insurance.

I hope you will join me for this month’s Webcast: Risk Management and the Personal Financial Planning Process. We will review the various strategies for risk management/insurance in the planning process: property and casualty; disability; health; life; long term care; annuities and how they affect planning for your clients.

Join us on Friday, March 28, 2014 at 1:30PM EST. For more information or to register, please send an email to Virtual Seating is limited. One hour of CE/CPE is available.

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