Continuing with the discussion of Life Insurance and frequently asked questions, Balanced Care would like to give you some insight on how to calculate how much Life Insurance you should have. Factors such as expenses, assets, and income replacement must be part of the equation.
As a “rule of thumb”, five to seven times your annual income is a good place to start, although, this can vary from person to person. Several life factors that will make this vary include your age, your income, whether you are married and/or have children, how much savings you have in place, your debts, and the cost of living where you reside.
So you can see this at work, I am providing an example for Mr. and Mrs. Robert Jones. Robert is married and together he and his wife have two children. Robert is the manager at a local grocery store and makes $40,000 annually. His wife earns $35,000 as a nurse. After all their deductions, Robert brings home $2,500 each month and his wife brings home $2.200 each month.
To calculate Robert’s income needs for his family should something happen to him:
Annual Income $40,000
Annual Income from other resources(Social Security) – $ 2,400
Annual Income to be replaced = $37,600
To help you consider expenses, Robert and his wife have a $200,00 mortgage and have 20 years before it is paid off. They also have a $20,000 auto loan and $4,000 of credit card debt. Robert and his wife would like to plan for their two children to go to college. Four years at college costs roughly $100,000 per student. Robert would like to plan so that emergencies are taken care of in his absence and would like to have at least half a year’s income put aside. He would also like to have all his funeral costs paid in full so his family doesn’t have to worry about another expense.
Expenses:
Final Expenses (Funeral Costs) $10,000
Mortgage $200,000
Debt (Auto and Credit Card) $24,000
Emergency $20,000
College $200,000
Total Large Expenses = $454,000
When calculating expenses, it is important not to overlook daily expenses. Childcare, housekeeping, home maintenance, yard care, and caring for a relative or parent will have to be paid for and should be included in your estimates.
In this case, the children are older so childcare would not be an issue. Maintaining a yard include mowing, raking, and snow removal. Maintaining a home could include hiring a plumber, an electrician, or having to replace a roof. To estimate the costs of these daily expenses, I am going to say that the family will do the mowing and raking, but will hire someone to plow the driveway during the winter months. For this example, let’s just estimate that there are normally ten snowfalls each winter that would result in plowing. The cost of this per storm is $40.00. This would be an extra $400.00 per year. It is hard to estimate how much maintenance will cost for their home which is the reason that Robert suggested having at least half a year’s salary put aside for emergencies.
Daily Expenses:
Snow Removal $400 a winter for 20 years = $8,000
Total Large and Daily Expenses $462,000
After your total expenses are calculated, it’s a good idea to take a look at your assets. In this case:
Checking and Savings Accounts $4,000
Investments (Bonds, Money Market, CD’s) $28,000
Life Insurance $125,000
Total Assets = $157,000
Total Expenses $462,000
Total Assets – $157,000
True Need of Life Insurance = $305,000
Making sure you are protected is always our first priority at Balanced Care. If you have any doubts on how your family or loved ones would get along without you, we encourage you to take control of the situation, have your questions answered, and contact us to help you calculate your needs. Consultations are always encouraged so that you will not only get to know me, but the insurance companies that I represent. Death is never an easy subject to discuss, but waiting until it is too late, is even harder.
Terri Trepanier is the Owner of Balanced Care and a licensed insurance broker in New Hampshire and Maine. Located in Rochester, NH, she specializes in helping individuals and businesses with their Health Insurance, Dental Insurance, Life Insurance, Disability Insurance, Long Term Care Insurance, Medicare Supplemental, Medicare Prescription Drug Plans, Accident, Critical Illness, and Cancer Plans. Terri knows the importance of insurance products and how they help individuals and families. She continually strives to give her clients the Peace Of Mind that each of us deserves.
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