- Bill’s take home pay (after taxes) is $6,000/mo and Amy’s is $4,000/mo
- Their monthly expenses are $10,000
- If Bill dies we need to figure out a way to generate $72,000/yr for Amy ($6,000/mo shortfall x 12 mos) to meet the expenses. If Amy dies we need to do the same for Bill at $48,000/yr ($4,000/mo x 12 shortfall)
- I assume 5% as a realistic rate of return
- For Bill I recommended $1,440,000 benefit and $960,000 benefit for Amy
- The benefit amount would be used to generate income ($1,440,000 x .05 = $72,000) and the principal would be kept in tact for future big expenses (vacations, children’s weddings, surviving spouse’s retirement, etc)
- I let them decide on how long they need it for depending on the age of their youngest child (their youngest was 3 so 20 years is good enough)

This formula is simple to put together, simple to understand and I’ve never had anyone challenge it. Plug in the numbers for your own situation and see what you think.

knowing that we either die too soon or live too long. when die too soon, our family need to be taking care. When we live too long, we will have health issue and we need some thing to depend on. We might need two type of policy. short term and long term. a long term must have these riders: terminal, chronic and critial illness that you can use while you still alive.
when buy life insurance, you can apply this concept:
Income replacement 10-20x of your income. plus education fund for your children four years.
Pay off your mortgage, final expenses and pay off your personal debts.

Actually, I do know. Because that is how it has been marketed for years. The whole 10x your annual income nonsense is based on the idea that your loved one can invest that balance and draw on it for the remainder of his or her lifetime.

Rather than being a lifetime of income, life insurance should cover necessary expenses, including your burial, and provide coverage for a period of time (variable depending on your age, dependents, and needs) for a transition to life without you.

Check out the book “Die Broke” for a nice rebuttal of the general way of thinking about a few things, including life insurance.

1) SAHMs should be insured for the EXACT reasons you stated! SAHMs are very very important to raising of a child and the “value” should be adequatly compensated for.

2) I know nothing about you, but run with scenario for a moment:
It seems like you have been out of work for 17 or 18 years? Hubby bought a 20 year term to cover the youngest child leaving teenage years. Think you can go back to work, being out of work so long, and earn enough to keep up the lifestyle you deserve?

Just a few thoughts.

“Like you my hubby has coverage through work (5X his salary) and we added another 10X his salary through another policy. We went with a 15 year policy since our youngest will be 18 at that point, and in that amount of time we should be enjoying the fruit of our compound interest.”

I have NO idea about her personal situation but lets take some creative licensing and play with it:

What happens if “hubby” dies in 14 years? THERE IS NO COMPOUNDING. Child #1 will be 17/18 and college will start, at 5% inflation what will college cost? Probably most of that policy just to send the kid to college.

What if hubby or Kelly becomes uninsurable during this time, which often happens? What if someone gets injured and can’t pay premiums, is there Waiver of Premium?

Just raising some points that most people don’t think about…Everyone tries to pay as little as possible when I think this number should be the base of your protection pyramid (or ladder lol) its better to overcompensate a grieving family than underinsure.

As for your final point regarding credit protection policies on loans, I disagree. These sorts of things are typically wildly overpriced. You can get a much better deal by simply figuring your debt into the amount of life insurance coverage that you need.

Now, if you’re married and have a family, there’s no question as to whether or not you need life insurance. But, life insurance is meant to replace income, so how much you need is rather subjective. In the event that you have no debt to speak of, you may need a little less. In the event that you have a lot of debt, it’s a good idea to have more. Here’s an example that we share with people at work, you can also find similar examples at http://www.cunamutual.com.

In 2004, the average amount of life insurance coverage was $146,300.

Let’s assume our example family has a mortgage balance of $31,000 (low, but you can scale it to your situation), a new car loan of $16,000, a credit card balance of $2,000, and we’ll assume the funeral costs to be about $6,000.

That’s a total of $55,000. Now, in most cases, families tend to pay off their debts from the life insurance policy, thinking it will make things easier for them. So, based on that, paying off the debt and the funeral expenses would leave our example family with $91,300.

But remember, life insurance is supposed to replace income, so let’s assume this household was making and living off of the national average of $32,000 a year. That’s a little less then three years worth of salary, assuming no investments. And, can you guarantee that if it is invested it will hold it’s value? Certainly not. So, life insurance is important, especially if it’s replacing income to take care of your family. But, my point is, oftentimes people need more then they think – though life insurance can and should be supplemented with credit protection policies on loans when possible.

Take the age of your youngest child and subtract from 21. Then multiply the result by your annual income– that tells you how much you need.

It saddened me during my days as a financial advisor to see how many unmarried people with no kids had been sold life insurance policies just because they didn’t know any better.

I actually sold life insurance in my previous job and I always thought the most important part of the process was the face amount people bought. I used the Human Life Value approach to start the conversation, as most people seemed to under-estimate their own value.

If people simply take a step-by-step approach to what they hope to accomplish with the death benefit, the number usually works itself out. I especially like your point about factoring in the cost of health insurance benefits, many people tend to forget that.

In my line of business so many people put off life insurance purchases because they are afraid of doing something wrong. Take the plunge and get something in place.

Term insurance is great because you are only committing to next month’s premium. If you realize you made a mistake then just reapply for something else. No surrender charges and no investment tie ins.

Neither of us will win the lottery, but our lifestyles will hopefully remain the same.

I always recommend treating the free coverage you get from work as a bonus and not to count on it. Usually the coverage is not portable if you leave the company and I’ve heard horror stories of companies forgetting to pay the premiums to the insurance company.

If a single person is in good health, they should be able to get a little bit of term, maybe $25k for 10 years that wouldn’t cost but a few dollars a month. Not a bad idea, especially if you have older parents who might not be able to cope financially if you are in an accident or something…

I don’t know why people panic about how much to get, just make sure you have some if you need it, some is better than none!

Like you my hubby has coverage through work (5X his salary) and we added another 10X his salary through another policy. We went with a 15 year policy since our youngest will be 18 at that point, and in that amount of time we should be enjoying the fruit of our compound interest.

I am a SAHM too, and have about 6x his yearly salary.

Both policies would offer us the ability to pay for funeral expenses, and give us years of a safety net. Super important while the kids are young.

Do you have a will? That’s next on our list. We have a basic one, but are going the lawyer route this time.