Is my life insurance policy at work enough? This is another question I get asked when first sitting down with new clients. Often, your employer will provide life insurance equal to some multiple of your annual salary for a few bucks a pay period. Because this is a group policy (covering a large amount of employees) it is usually cheaper than what you would find if you shopped around outside of work.

Self-insurance

Some can afford to not purchase outside life insurance because their assets and/or group life insurance proceeds would provide enough income to their families. Or put another way, no one would be depending on their employment income to provide what they needed to continue their way of life. They can then self-insure that future need.

If you plan to self-insure, it’s a good idea to go over the plan with your spouse so they are comfortable with that decision. There are a lot of questions and concerns with your plan your might not be aware of until you have that conversation with your loved ones.

Do I need life insurance?

When you are younger, you might need more insurance to take care of your family if you were not here to provide an income. The income you will earn in the future is your biggest asset – and much like your home, you’ll want to protect it. Your work policy insurance would cover the basics like funeral expenses, paying off a house, paying for kids’ future college expenses, etc. You’ll just want to run through that scenario with a life insurance specialist or financial planner to make sure you’ll have enough to pay for your family’s future expenses.

At some point, especially if you are no longer working, life insurance might get more expensive. Your age, your current health status, lifestyle and many other factors can affect your life insurance cost.

How do I know if I have enough?

To determine if you need life insurance, it’s a good exercise to figure out your total assets and then figure out your insurance need. Then we can determine if those assets can cover the need.

Short-term needs

First, let’s look at short term expenses that might come up for your family. If you were to pass away today, your family would need to pay for your funeral and burial expense. These expenses can vary widely depending on your personal preferences, but on average, you can estimate around $10,000 to take care of it.

Next, you’ll want to replace your income so your family can continue their standard of living. How long would you want to replace that income? Would your spouse go back to work? You want to make sure your family has enough cash to take care of anything they would need quickly.

Life insurance proceeds might take a while to get to your family, so having enough cash on hand to pay the mortgage and living expenses for a few months is critical. It’s also helpful to have that cash accessible by at least one family member so it’s not tied up until everything is settled with the estate.

Long-term needs

Now that we’ve discussed short term needs, you need to look at the long-term life insurance needs your family might have. These can include college expenses for your dependents, the mortgage

• College expenses. Average in-state tuition in Texas is around $10,000 a year. If your kids are younger, you could probably get away with putting away a little less, as long as you aren’t socking it away in a savings account. You’ll need to keep up with the rising costs of college tuition by investing a portion of it.

  

• Debt. Your family might want to pay off any credit card or student loan debt to reduce their monthly expenses.
• Mortgage. Paying off your mortgage can be a good way to help your your family when you are out of the picture. First, it will most likely keep them in the same house they have become accustomed to. Second, it will most likely significantly reduce their living expenses, which will be important now that they no longer can depend on your income from work.
• Weddings. Some people want to leave money behind for their kids’ wedding costs. Obviously this one that can vary greatly with personal preference as well.
• Income replacement. The biggest need to replace might be your income. If you’re a high-earner, you’ll need a good chunk of assets to replace that income. For example, if you want to replace $125,000 of income, you’ll need about $2.5 million in assets and/or life insurance proceeds (I used a 4% withdrawal rate here, to make sure they money will last a long time). Keep in mind there will most likely be a social security benefit as well to help offset some of the income need.

Now that you’ve determined how much your family will need, you’ll need to figure out if your assets can cover your family’s expenses. Like I mentioned above, a 4% withdrawal rate taken from a pool of assets is a reasonable method to determine if you have enough. You’ll also want to account for taxes on withdrawals from retirement accounts as well.

Not sure if you have enough coverage or want another pair of eyes on your life insurance need calculation? I’d be happy to help. Just shoot me an email Brian@TheAeroAdvisor.com