When we’re young and single, life insurance is often the last thing on our minds. Without dependents to support, it may seem unnecessary. But as life progresses—marriage, children, and financial responsibilities—securing your family’s financial future becomes a priority.

Life moves fast, and ensuring your loved ones are protected in case of an unexpected tragedy is a crucial part of financial planning. The thought of leaving your family in financial distress is overwhelming, and life insurance serves as a safety net, providing security and peace of mind.

The big question: how much life insurance
do I need, and how long do I need it?

Term Life Insurance vs. Permanent Life Insurance

Many opt for term life insurance, which provides coverage for a set period—typically until retirement. At that point, accumulated savings, pensions, and social security may reduce the need for coverage.

However, some situations call for permanent life insurance, especially in estate planning. This type of policy can create an “instant estate” at death, helping cover estate taxes while being free from capital gains or income tax.

How Financial Planners Determine Your Life Insurance Needs

There are three primary methods financial planners use to calculate life insurance needs:

Method #1: Human Value Approach: Replacing Your Lifetime Earnings

This approach estimates the total income you will earn throughout your life, adjusting for taxes and personal expenses.

Example:

• Jerry, 35, earns $60,000 annually and expects 4% salary increases.
• After deducting taxes and personal consumption, his family relies on $35,000 per year.
• With a 30-year work expectancy, Jerry would need a 30-year term policy for $1,050,000 ($35,000 x 30 years).

Method #2: Needs Approach: Covering Your Family’s Essential Expenses

This method calculates how much money your family will need after your passing. Factors include:

• Funeral costs ($5,000-$10,000)
• Debt elimination (mortgages, loans, etc.)
• Education expenses for children
• Surviving spouse income to sustain the household

Social Security survivor benefits may offset some of these expenses, making this a highly customized approach.

Method #3: Capitalized-Earnings Approach: Preserving Wealth for the Future

This method ensures the death benefit provides a perpetual income stream for your family by considering investment returns and inflation.

Example:

• Using Jerry’s case, if the family needs $35,000 annually and expects a 6% investment return, the required insurance amount would be $1,820,073.
• This higher coverage ensures income indefinitely and potential estate growth.

Making the Right Choice for Your Family

There’s no one-size-fits-all answer to life insurance, but these methods provide valuable guidance. The right policy depends on your financial goals, family structure, and long-term plans.

A financial planner can help you determine the ideal coverage to protect your loved ones. For expert advice and a free consultation, visit us at www.f5fp.com, or schedule a free consultation.

 

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