If you’re reading this, let me begin by saying I’m proud of you.
It’s a very honorable thing what you’re doing…considering a life insurance policy.
For most people, the thought of their own death is so displeasing that they’d do anything to avoid it.
Sure people will joke about it, but to really think about how live will go one for everyone else when it doesn’t for us, that’s unpleasant to say the least.
No one likes to think about our end, and yet, we will all have to meet that reality one day. The reason I’m proud of you is your willingness to fight through the discomfort because you’re concerned about what you’re going to leave behind.
Motivated By Love
What I’ve found over the years is the main motivating factor which drives people like you to the realization they need life insurance—it isn’t fear; it’s actually love.
These people have loved ones they care deeply about.
So deeply, in fact, they’re willing to spend a little of their hard-earned money now to make sure their families are taken care of to the best of their ability once they are no longer here.
I know you’ve had some of the same thoughts, or you wouldn’t be taking the time to learn about life insurance.
So Many Options, But a Simple Formula
Now, there are thousands of different options when it comes to how you structure life insurance.
Before you can decide which policy is right, you have to start with your needs.
Life insurance is just like all the other types of insurance. What makes it right for you is how it fits your needs.
Your family, your situation, and your needs are different from anyone else’s. So let’s begin by talking about some basic categories of needs your loved ones might have should something happen to you.
Grab a scratch piece of paper and write out this acronym: LIFE.
It will help you categorize what you need to cover.
The amounts will be yours to determine.
At the end of this exercise you can decide how little or how much you want covered.
I’ll talk a little about each category, and you can do the figures for yourself.
If you’re looking for a more detailed needs analysis, feel free to give me a call, and we can set up an appointment.
However, this is a basic formula I use almost every day, and I’ve found it helps people think through what they want covered.
So let’s begin. On your scratch piece of paper copy this:
L Amount Needed: $
I Amount Needed: $
F Amount Needed: $
E Amount Needed: $
MY TOTAL LIFE INSURANCE NEED IS: $
L stands for Loans.
Think through any outstanding loans you have right now.
How much do you owe on mortgage, car loans, student loans, or business loans.
How about any recreational vehicles or secondary homes you might have purchased?
All of these loans become your family’s responsibility even if you’re not there to help.
Practically speaking, that means they either keep paying them, pay them off, or have to sell.
Those are the only options.
If you budget for a portion of your life insurance to pay off the loans, your family won’t have to worry about them, AND you created margin in the monthly budget at the same time.
It’s not uncommon today for people to spend as much as 40-50% of their monthly budget on repaying loans of some type.
Also don’t forget about any credit card balances you may be carrying.
The key to this performing the way you want it to is to take the time to add up ALL the debt.
I stands for Income Replacement.
One of the biggest hardships on a family after losing a loved one is the loss of income.
This is especially important if you are the main breadwinner for the family. How would your family replace your lost income?
Lots of people will take their gross yearly income and multiply it by a factor. What you’re doing for your family here is you’re buying them time to adjust at a minimum.
The more you multiply, the longer you ensure their current standard of living.
For example, if you make $150,000 a year and then add $150,000 for income replacement, you’re insuring that amount for at least a year in which your family can continue to function at its current living standard without having to adjust.
If you multiply by a factor of 10 to $1.5 million, now your family is in a position where they could take that portion of the death benefit and invest it.
This could be the difference in your spouse having to go back to work at some point in the future, or being able to stay at home and not worrying about replacing your income.
The key factor here is this question: do you want your spouse to work if something happens to you unexpectedly?
And as a side note, take a minute and discuss this with your spouse. Make sure you are all on the same page on this fellas!
In the end, it’s your choice how much income replacement you add in, but common factors people choose are 1, 5 and 10 times their gross annual salary.
If you’re a stay-at-home mom, of course no one can replace you, but the work you put in every day is still incredibly valuable to the family.
To replace you could take tens of thousands of dollars a year in hired help.
Think through what it would cost to hire a childcare, house keepers, laundry service, even chefs. I don’t know your lifestyle, but you do.
So think through what it would cost your family to continue to run like it is right now.
A basic monetary range a lot of stay-at-home moms come to is $30-$50 thousand per year.
F stands for Final Expenses.
This can be medical bills, funeral arrangements, etc.
Most families today in the middle of raising children don’t have funds set aside for these types of final expenses.
Medical bills alone can run into the tens of thousands very quickly.
The average funeral today costs about $15,000.
So this category allows you to add in some money to cover these types of final expenses instead of having to take it out of what you would use to pay off a loan or use for income replacement.
A basic monetary range many families land in is $25-$50 thousand. The great thing about adding this cushion to your life insurance is it won’t cost you a lot extra.
On a basic term policy, you’re talking about a few cents a month to add an extra $25 or $50 thousand.
E stands for Educational Expenses.
College tuition costs are skyrocketing.
I don’t know if you’ve priced any recently, but they’re up 40-60% from just 20 years ago on average.
Many people have college saving plans in place, but if you lose half your family income or all of it unexpectedly how would you stay on course to pay for college?
Most people couldn’t. This is why many people choose to add a section to their life insurance policy to make sure college is covered.
The key question to ask yourself here is where do I want my kids to go to college?
Do you want them to go to a private school? If so you better plan for $40-$50 thousand a year.
If state schools are more your style, you can plan on $20-$25 thousand a year.
So if you’ve got 3 kids and you want them all to follow you to A&M that would roughly be $80,000 per child for a grand total of $240,000.
The Final Cost
Now if you’ve gone through this exercise, you’re probably thinking, “My total loan number is so big there’s no way I can afford it!”
That’s a normal response! Most people don’t realize how much their going to spend for all these things.
Let me say, “don’t freak out.”
You’ll probably be surprised how affordable it can be to cover all these things and still fit it in the budget once we talk.
More importantly, if you could set your family up to pay off all these things and leave them debt free wouldn’t that be an incredible gift?
Through your life insurance policy, you can do this. You decide how much or how little of your need to bite off. Remember, any amount of life insurance you add will decrease what your loved ones have to worry about financially.
