Life Insurance, How Much is Enough?
Posted on September 24, 2007
Filed Under Home Finances |
With the purpose of life insurance being to provide financially for the surviving family members in the event of the death of one of the head of the household, you must ask youself what will be needed for your loved ones.
Let’s look at Mike and Jill. Mike goes to work every day at his job, and Jill works every day as a stay-at-home mom and homeschool teacher. Mike works hard, but willingly acknowledges that Jill probably has the harder job.
Mike earns about $100,000 per year. With a $1,000,000 term life insurance policy, if Mike should die while the kids are young, Jill will likely need the death benefit to pay off the mortgage, property taxes, save for the children’s college educations, and continue to pay all the bills as usual. If Mike were to leave Jill and kids with insufficient or no insurance, then Jill would likely have to give up her homeschooling immediately and get a job. She would have to find someone to take care of the kids when they were not in school. Even with whatever job she might be able to land amidst her crisis, there is a good chance they could still lose their house.
Assuming a 10% rate of return if conservatively invested, the one million dollars would provide about $100,000 per year, as to which their household has become accustomed.
However, she and Mike agreed that if he died in such a case, they would want Jill to be able stay home with the kids. They also agreed that if she were to die and leave Mike with the kids, they would want Mike to either not have to work or only work part time. They took out a $500,000 policy on Jill because it fits their current monthly budget. With Mike’s expertise in his profession, they believe he could fairly easily work part time and make sufficient income to satisfy their needs.
Nonetheless, Mike realizes that if Jill’s work was monetized, the value of her cooking, cleaning, washing, raising and schooling the kids, and handling most of the administrative household functions would probably cost as much to hire out as Mike’s job brings in. Plus, if Jill died, he would want to spend more time with his kids and not have to work. So, they plan on purchasing a supplemental policy for Jill when their budget allows.
Mike and Jill each purchased 20 year term policies when their first child was born. Now he is 10, and their youngest is 1 year old. In order to keep coverage until their youngest is about 20, they plan to purchase a 10 year policy when their current 20 year policy expires in 10 years. However, because when you buy a policy you are locked into the rates or rate plans from the time of purchase [as long as you continue to make your payments on time] regardless of whether your health changes, they are considering purchasing an additional 20 year policy for each of them sooner than later. Yes there will be an overlap amongst the policies, but it will be during the time that all of their kids are at home and when a death benefit would be most greatly needed.
In summary, consider carefully how much money your surviving household would need, and consider the timeframe of the needs. The measure of your financial success in this life might not be realized until you leave it and go to the next.
Regards,
Stephen Dunbar
PS: On a personal note regarding “eternal life insurance”, my favorite policy is stated in the Bible: John 3:16 - and it’s already paid for, if you decide to accept it!
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