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How Much Life Insurance Do You Need?
Author: Marilyn KatzLife Insurance Needs Analysis is an necessary step for your financial planning. Even if you sit down with a professional financial planner or insurance agent, you should have some idea of what factors are used to calculate your suggested death benefits. I find that the more informed that consumers are, the more they were satisfied with their purchase decisions. It may take more conversations with informed clients to actually settle on a deal, but those deals tended to stick.
When I worked as an insurance agent, one of the most common things that clients wanted to know was how much life insurance they might need. Of course, as an agent, I had to balance an ideal figure against the cost of the premium. I knew that I needed to offer them enough life insurance to really protect their family. But if I suggested a premium rate that would not fit into their budget, then they would either refuse the policy or cancel it later. I always tried to get some idea of how much money the felt comfortable with spending.
I did write a script for a simple life insurance needs calculator. I took into account a year's salary, funeral expenses, existing debt, and planned future events like college tuition. Of course, any financial planning should include some emergency money too, so I fitted that in.
My life insurance needs estimates were actually fairly conservative, and many other financial professionals and insurance agents thought I should double them. Even with my conservative planning formula, many families were surprised. Of course every family has different needs, and any formula should only be a starting point for discussion and analysis.
For instance, part of a family's debt may the payments on a second car. They would not need that car if one spouse passed away so they could eliminate a payment. On the other hand, if one spouse did not bring in any income, one year's income may not be enough to assist the family get back on track.
I think the life insurance needs calculator is a useful tool, and helps present a graphical image which many individuals enjoy. However it is not the only tool, and doesn't replace personal calculations.
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