Why You May Need Life Insurance – Income Replacement


Marriage 1In my parent’s time the husband earned the household income and the wife stayed home and took care of the children.  The Baby Boomer generation has different expectations.

Today, there is no expectation of who brings home the pay-check.  In many households both husband and wife are employed outside of the home.

As a rookie insurance agent I was taught, “Everybody needs Life insurance.”  Over the last 25 years I have changed my mind.  I have come to the conclusion that Life insurance is a necessity for many Americans but is only a luxury for others.

You only need Life insurance if you are able to identify a need.  The idea of buying Life insurance, “just because,” is a waste of your time and money.

So far this week I have mentioned some legitimate reasons for buying insurance.  If you want to read my thoughts, click on the links below.

In today’s post I want to address the insurance needs that wage earners, of any gender, have.  The need to know that spouses and children are able to keep the standard of living they had while they were alive is important to many dads and moms.

Replacing an income will allow survivors to eat the same food, wear the same clothes and drive the same type of car they could before the parent passed away.

HOW MUCH NEEDS TO BE REPLACED

It is not necessary to replace an entire income.  Use the formula below to  calculate how much term Life insurance you need.

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Now that I am at a “mature age” I find myself in a curious position.  It is surreal.  It seems like just yesterday my wife and I were camping with some friend of our’s and their 3 boys.  We adults were sitting around the camp-fire while their boys and ours were off in the woods playing.

A few weeks ago, my wife and I visited one of those boys and his wife in the hospital.  She had just given birth to their second child.  It is hard for me to believe that a kid that we know and love has a kid of his own.

After the birth of his first child, he contacted me for Life insurance.  He wanted to make certain that if something were to happen to him, there would be enough money coming into the house-hold to replace his income.

CALCULATING HOW MUCH INSURANCE IS NEEDED

The answer to his concern is really quite simple.  There are 2 ways to calculate how much money is needed.  Those methods are as follows.

ANNUITY

In a life insurance policy is a table that shows how much money would be paid to a beneficiary if they were to request the insurance company to pay the benefits in equal installments over a period of time.  Ask your insurance agent for a copy of that table.  It can be called either a “Settlement” table or an “Annuity” table.  Your insurance agent may know it by an even different name.  If he does not know what you are referring to by name, try describing what it does.

Once you have the correct table, your planning work will be easy.  All you will need to do is use that table to calculate how large your Life insurance policy needs to be.

INTEREST

The problem with the Annuity approach is that after the insurance company has paid out the proceeds, as they promised, there is no money left for succeeding generations.  If that is not acceptable to you, there is an alternative.  I call it the “Interest Only” strategy.

This strategy requires that you deposit a large sum of money in any of dozens of types of interest bearing investments.  Some people elect to use Certificates of Deposits, others prefer to use long-term bonds, still others use a Life Insurance company that has an “Interest Only” settlement option.

Regardless of which vehicle you use, the strategy is the same.  Your beneficiaries will deposit your Life insurance proceeds into an interest bearing account of some sort.  Each year, they will only withdraw the interest that was earned on their initial deposit.  When your beneficiary dies or no longer needs the income that is generated, the full amount of your Life insurance pay out is still there.  It can be used to benefit your heirs, a favorite charity, or any other purpose.

The calculation for the amount of money that you need for this strategy is fairly simple.  All you need to do is divide your annual income by the interest rate that you think your beneficiary would be able to find.

Both the Annuity and Interest Only strategies are going to require you to have a large amount of money when you die.  Obviously, the amount you have in savings can be applied to that final figure.  However, the average American does not have the full amount of money required in savings.

According to the latest figures I have seen, the average American retires with less than $100,000 in savings.  That tells me that younger families who would be inclined to replace a full income have even less.

Rather than using the philosophy that, “Something is better than nothing” and spending all your insurance budget on a larger Whole Life policy, you can often buy enough Term Life insurance to replace your income to your family.

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If you do not already have an established relationship with an insurance professional who is able to help you, I would like to apply for the job.  You can learn more about me by visiting the ABOUT page of this blog.

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