A million dollars was a dream goal for many of us when growing up. Even now its quite a nice lump sum of money. But is it really enough when it comes to life insurance and will your loved be okay with a million dollars if you pass? Well, that depends on many different factors which should be considered before jumping to any conclusions. In a good number of cases getting a coverage for a million should do the job, but lets see if that will apply to you.
Factors to Consider
The amount of life insurance to purchase should be determined solely on your current need and circumstances. This usually calls for a needs analysis which is done by an experienced agent so let’s look at the most vital factors.
Income
How much you earn is one of the most important things to consider. Since one of the main purposes of life insurance is to replace the breadwinner’s income. So lets say you earn $60,000 per year and want to make sure your family will need to have your income up until retirement. In this case if you are 40 years of age, you need to replace 25 years of income. It is usually calculated that your family will need approximately 70% of your income.
Debt
Right after income in the importance of things is all the money you owe. This includes your mortgage, student loans, credit cards, business loans and anything else your accountant might mark with red ink. When calculating life insurance needed you want to add all these up and make sure they get paid off. The mortgage is probably the most important since paying it off ensures your family will always have a roof over their head. From our previous cases the majority of peoples debt will total between $300k to a couple million dollars.
College Funding
If you have children, then you most likely want to make sure that they get a top notch education regardless if you are here or not. The average cost of 4 years tuition will be roughly between $30,000 to $50,000 depending on the university. Depending on how many children you have, you simply multiply that by the tuition cost. In most cases, people will usually have between 2 to 4 children so figure to stash away between 100k to 200k for a brighter future.
Final Expenses
You also need to calculate immediate expenses that may accrue immediately after the death. This can be the cost of the funeral, which can range between 10k to 15k. Sometimes there may also be hospital bills so you may want to account for that as well. Also, don’t forget that your family may have to pay legal fees for various processes. If your estate is worth over $5.34 million you may also want to calculate the taxes into your life insurance.
By now you may get an idea that $1 million may come up short in some instances, but it can be enough for others, it’s all about diligent calculations. Lets use Nick as a hypothetical example of an average American and see what we come up with.
Nick Makes a salary of $51,017 (median income in the U.S.) Nick is 40 years of age and needs to replace coverage for 25 years. His family will need approximately 70% of his income to continue living the same lifestyle as if he was still providing them. So 70% of $51,017 is $35,711 and lets multiply that by 25 years. What we get is $838,775 which is what we need just for the income part. Nick also has a $300,000 mortgage loan and credit cards for $10,000, so total debt of $310,000. He also has 2 children so let’s multiply that by $40k for each child with $80k total for college funding. Let’s also just round and add $20k for final expense just in case.
Let’s add everything up:
$838,775 (income replacement 25 years) + $310,000 (total debt) + $80,000 (college funding) + $20,000 (final expenses)
= $1,248,775
Even with all the factors above, there may be a few others depending on case by case basis. Some people will also calculate retirement planning, estate planning, business continuation and charitable giving that can bring the amount of coverage needed even higher. As you can see even in the average case one million of life insurance comes up short by about a quarter million. That’s why sitting down with your agent and completing a needs analysis is very important to decide how much life insurance is enough.
At the end of the day we always recommend to buy the amount of life insurance that you can comfortably pay every month without a lapse. The good news is that term life insurance rates are at an all time low and someone like Nick can secure a 25 year term with a $1,250,000 face amount for a monthly premium of $108.50 per month. I’d say that’s a fair exchange. By the way we do work with over 60 top life insurance companies, so feel free to compare quotes with the best of them here.
