Calculating How Much Life Insurance I Need?

Over the last few years my income has changed rather steadily and we’ve had another baby.  So it’s time to re-evaluate my life insurance coverage. 

I view insurance as protection to my family in case I should suddenly die.  I want to ensure that my wife and children are adequately taken care of and that they are not unnecessarily burdened as my income is a significant portion of our household income.  I do not view insurance as a windfall for my family, but simply a mechanism to replace certain obligations that I have and will cover through the years.

In looking at the major categories of expenses I will look at my family’s immediate needs, future income needs and account for existing resources available to cover these expenses.  The analysis also include existing resources available that can be used to offset my family’s need.

Immediate Needs

 

Final Expenses (Funeral etc.)

 $10,000

Emergency Fund

20,000

Pay Off Mortgage

199,800

Other Debts

10,000

Education Fund*

64,100
Total Immediate Needs

 $303,900
 

 
Future Needs

 

Education Fund*

 $13,600

Income Replacement**

423,000
Total Future Needs 

 $436,600
 

 
TOTAL NEED

 $740,500
 

 
Available Assets

 

Investments

 $16,000

Retirement Assets

 35,000

Other Personal Assets***

 20,000
 Total Available

 $71,000
 

 
LIFE INSURANCE NEED

 $669,500

Education Fund

I have three kids: Two teenagers and a two year old.  In today’s dollars I’m figuring that tuition will cost $8,750 per year or $35,000 for a full four year term.  The two older children are 1 and four years away from college and thus I am not willing to put their college funds at a significant risk.  Therefore I am assuming a return on investment of 5% and inflation of 3% for a real rate of return of 2%.

For the 17 year olds present value cost is $32,700 and the 14 year old’s projected present value is $31,400.  The baby has a longer time frame and I’m projecting an 8% return with 3% inflation.  The present value of her education fund is $13,600.

Income Replacement

If I were to pass away today my family would no longer be burdened with my living expenses.  I anticipate my wife could easily live off of 60% of my current after-tax income of $30,000.  She is 36 years old now and I would like to ensure she is taken care of until at least the baby is through college.  I expect she would need additional for at least 25 years.  Using the same assumptions as for the two-year-olds education fund, the present value of the income replacement is $423,000.

Other Personal Assets

These are personal items that could be sold if I were to die.  These include things like my car and some other personal valuable effects.

Conclusion

I currently hold a term life insurance policy of $600,000 and should look at increasing the coverage to $700,000 to cover the anticipated shortfall.

Resources

 

Estate Planning, Insurance

Reasons We Spend

I was pondering some the dumb purchases I’ve made in my lifetime and what motivated me to make the decision to part with my hard earned dollars.  I had often watched in wonder as other people had expensive “stuff” and wondered why I didn’t have the same.  I guess I began chasing what they had and undertook to increase my income and then proceed to buy more in a way to demonstrate I had the same resources as those people I was admiring.

About 15 years ago I wasn’t getting any closer to this undefined goal and began looking deeper at what the differences between what I was doing and what others were doing.  I then had an epiphany and realized that I was going about it all wrong.  I was perusing conspicuous consumption instead of saving and investing.  The people I was admiring were probably deeply in debt and had little savings.

Changing Habits

The first thing I had to do was to change my attitude.  My issue with money had been a combination of my desire to “keep up with the joneses,” a lack of patience, and power.  Each of these is intertwined but I focused on my lack of patience.  I had to ask myself if I really needed what I wanted to purchase and if it was expensive I forced myself to save for it.  This exercise alone gave me more gratification than the instant gratification from just buying what I wanted.

Related Articles

Here are some related articles on this topic:

Frugality

Lessons Learned From Shopping Around

Last week, I wrote about how I called my car insurance provider and had them add my home insurance to my existing auto insurance policy and saved a bunch of money (I know sounds like Geico commercial, but I didn’t switch to Geico!).  It got me thinking about other regular expenses I have that I hadn’t given much thought to that could be subjecting me to the cost creep.  As I look through my budget there are some opportunities to save some more all important dollars:

All tolled, I figure I could add an additional $150 to $200 per month just by working a little smarter.

Related Articles

Save more at Quicken.com + Free Shipping

Frugality

Mortgage Update #2

I called my bank to increase my weekly payments by 5.3% and the change was made immediately.  The person on the other end of the phone told me that few people ever call to increase their payments.  Most call to decrease them.

I asked what the maximum I could pay on my mortgage and was a little shocked (granted I could have read the mortgage document, but who really wants to do that!).  The “pre-payment” options were ridiculously generous. 

I am allowed to make annual lump sum payments of 20% of the original mortgage principal.  This amounts to $42,000 per year.  While this is more than generous, I would probably never be able to make a $42,000 lump sum payment but it does afford me the opportunity to drop any other bonuses or windfalls I receive on my mortgage.

The bank also allows me to annually increase my payments by 25%.  Again this is more than enough but if I happen to land a dream job and get a 25% raise in pay, I could increase my payments accordingly.

Debt, Frugality, Mortgages, Savings & Investment

Saving Money on Insurance With A Phone Call

I received my homeowners’ insurance policy renewal a few weeks ago.  This is one thing that I’ve always looked at but never given any real consideration.  Perhaps its ignorance or maybe I think it’s a necessary evil, but I put it off to the side and don’t give it much thought.  This year I looked at the renewal notice because I’ve been getting calls from the insurance broker that insures my cars asking me to consolidate my homeowners’ policy. 

It turns out that the premium on my existing homeowners’ policy is going up by 10%!  I was shocked and pulled out the previous year’s renewal notice and it too was an increase of 10%.  In the two and a half years I’ve owned this house my insurance company increased my premiums by a total of 21%.  I have no idea how they justify a 21% increase.  House prices have not increased by that much and I can’t see my home and neighborhood being that much risky in two and a half years.  Needless to say, I called the broker who provides my car insurance and asked for a quote.

After a ten minute phone call and a fax of my current policy to the other insurance broker, I had a quote.  Here is what the company that insures my car quoted me:

The same policy plus a few extras resulted in a 15% DECREASE from my current premium.  To top it off (it gets even better), my homeowners’ premium will be decreased by 5% this year and a further 10% next year.  In addition, they are going to reduce my car insurance premiums by 5%.

The decision was an easy one.  I took their offer and my existing policy will lapse.  I also fired the insurance broker who sold me the policy in first place.  This guy was looking for easy commissions with little service.

Frugality, Insurance
Previous Page
Next Page