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When it comes to purchasing life insurance, it’s remarkable how so many people are still using the old “10X Formula.” This outdated formula simply calls for purchasing 10 times your annual income in life insurance and you’ll be just fine. Are you kidding me?
There are so many ways to refute this that I won’t waste your time or mine doing so. It just doesn’t make any financial sense on so many levels. Why would you chance an outdated useless formula when you can use a life insurance calculator that can be found all over the internet? Life insurance is about “needs” so a “financial needs analysis” will make the most sense no matter what your financial situation may be.
What is a Life Insurance Calculator
The folks over at LifeHappens.Com make great points when it comes to the life insurance calculator; in fact, they provide one you can use for free.
“When purchasing life insurance, the question really isn’t how much you need, but how much capital your family will need at the time of your death, which depends on two variables:
1) How much will be needed at death to meet immediate obligations?
This amount takes into account all final expenses: uncovered medical bills, funeral and estate-settling costs, outstanding debts, mortgage balance and college costs to name a few.
2) How much future income is needed to sustain the household?
This is the number you’ll arrive at after calculating the “present value” of cash-flow streams your family will need after your death”. Read the article…
Certainly, using a calculator makes better financial sense because it takes into consideration all of your current financial needs minus any funds on hand to deliver an adequate death benefit.
What about the 4% Method?
For many financial planners and insurance agents, the 4% method represents a conservative solution for calculating your life insurance needs. Forbes.Com contributor Larry Light does shed some light (pun intended) on the subject.
If someone depends on you financially, you need to have life insurance. Life insurance policies come in many shapes and sizes.
A good conservative estimate for the yearly income that a lump sum generates is 4%. For instance, if you leave your partner $1 million of life insurance, that produces about $40,000 of annual income for the rest of your loved one’s life. This assumes the income grows with inflation each year and your partner has a low chance of ever running out of money.
It’s doubtful that the $1million dollar face amount will work for most families but $2million will likely be sufficient. With the low prices on term insurance out there, this method is certainly doable but we have to remember that Term is temporary and usually needs to be converted down the road which is going to translate to much higher premiums.
Won’t I have to Update My Plan going Forward?
Yes, you absolutely need to review and update your life insurance going forward. Depending on your agent, you’ll likely be contacted on a regular basis to discuss your current financial situation and make any changes necessary. But, how often will that happen?
According to John Burger, a contributor at NerdWallet, Inc. and a wealth coach:
Our standard review process with wealth coaching clients is to have them review their life insurance needs (either with us or their agent … or preferably both) every 12-18 months at the same time they review their other insurance (auto, home) coverage.
If your insurance agent isn’t contacting you at least every 18 months for a personal insurance review, you need a new insurance agent. Read the thread…
A life insurance review every 12 – 18 months probably makes sense to most people since they typically prefer not to hear from an insurance agent very often anyway, but this does not take into consideration the life events that most of us go through. Life events are typically haphazard and do not occur on a regular basis. Knowing this, you, the policyholder are going to have to accept responsibility for letting your insurance professional know when you get married, buy a house, take on large debt, or add to your family. Not doing so will certainly lead to being underinsured.
Where can I find the Best Life Insurance Calculator?
Fortunately, there are many online life insurance calculators available online at no charge. You will, however, likely be contacted by an insurance professional if the calculator requires your contact information. Listed below are the life insurance calculators that we recommend you take advantage of. Click on the LINK to visit their page:
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