How Much Life Insurance Do I Need?

Four things I strongly recommend before you make any decisions about life insurance:

1. Make sure you speak with an experienced agent. Ask them how long they have been selling life insurance.
2. Make sure the agent represents several carriers, not just one.
3. Make sure the agent is licensed in your state. Ask them how long they have been licensed in your state.
4. Ask them to fax a copy of their license for your state. If they won’t, move on.

Some of the above standards are subjective. (How long is “experienced”?) Just make sure you are dealing with a reputable, experienced agent, licensed in your state, who is happy to give you evidence of his or her qualifications.

An experienced agent can walk you through the nuances of underwriting – here’s an example:

A 40-year-old male, in perfect health, whose father died of colon cancer at age 58, applies for life insurance over the phone or online. Because of his health, he appears to qualify for a great premium rate. He applies, takes the required medical exam, and waits 4-6 weeks for the answer. When his policy is presented to him, the rate is one-third more expensive than what the agent or web site had quoted. Why? It’s because his father died of colon cancer at age 58. That makes the applicant a greater risk.

Fine—but why wasn’t he asked about family health history during the initial interview? Because you were dealing with an agent or salesperson whose goal was to get you most of the way in the door with the promise of a “great, low rate!”. Rather than start all over with a different company, they know you’ll probably take the policy at the higher rate.

An experienced agent who has your best interests in mind will give you an initial quote that takes everything possible into account so there are no surprises when it’s time to write a check.

Do I Need Life Insurance?

Two simple facts:

1. If no one has anything to gain or lose financially by your death, you don’t need life insurance.
2. If your income is the source of support for others, you probably need life insurance to replace your lost income in the event of your death.

The situation changes dramatically if you have children. I use a simple formula. Take 10-20 times your current income (depending on your age) and add college expense or each child (2017 numbers (tuition, fees, room and board) are $28,000 per year for public college and $45,000 for private). The college expense would be invested and not be used for any current income needs.

This formula in many cases will dictate over $1,000,000 of coverage. Most are astounded to hear that number. But let’s look at that for a moment. Assume we have someone making $100,000 per year, has a spouse and two young children and wishes to replace 60% of that income, adjusted for inflation. That’s $60,000. $1,000,000 will disappear quickly.

Breaking Down your Life Insurance Needs

So here’s what it looks like:

Initial Capital: $1,000,000 Initial Income: $60,000
Interest Rate: 5.00% Inflation Rate: 2.00%
Tax Rate: 20.00% After-Tax Interest: 4.00%