So many things about life are complicated. Choosing a career can last a lifetime, since what you think you want to be, or even got your college degree for, isn’t what you want by the time you get your diploma four years later. Making a major purchase, like a car or house can be complicated. Relationships. That’s all you need to say about that. Choosing a spouse or partner can be the most complicated life situation. For some, it takes a couple of tries before they get it right.
Deciding how much life insurance you need for yourself or family can be another one of life’s difficult decisions. Not anymore. A Forbes article, “How Much Life Insurance Do You Really Need,” by Larry Light takes the mystery and higher math out of that decision. Alan Moore, a financial advisor from Milwaukee, has a simple formula for determining the right insurance coverage. This is welcome news for individuals as well as insurance professionals. Simple calculations make insurance needs clear to customers and may help them make a decision to buy.
Instead of complicated tables and life expectancy charts, Moore uses a simple four percent as the basic rule. Beginning with the premise that anyone with dependents needs insurance, he suggests you calculate the amount of income a life insurance settlement would generate at four percent. For example, a $1,000,000 policy would generate $40,000 of annual income for a beneficiary, provided the income rises with inflation and the person leads a lifestyle where they won’t run out of money. If that’s not enough, then the amount of insurance should rise accordingly to produce the amount of income based on four percent of a policy value.
How much money will your loved ones need if you die tomorrow? Pick a number and then multiply it by 25. That will give you the amount of life insurance you need in order to generate the proper annual income using the 4 percent rule. For a $100,000 annual income, you’d need a $2.5 million policy.
Now, if that loved one will inherit other assets that will produce income, that can be deducted from the insurance policy amount. In the article, a $1 million inheritance with the same four percent calculations would generate $40,000 in annual income. That leaves a $1.5 million insurance policy to make up the remaining $60,000--A tidy sum that should keep those loved ones secure for many years.
This method may not include a lot of variables. Moore said to consider other factors before you sign on the dotted line.
1. Does your loved one have earning power? If they are already generating income, that amount can be deducted from the overall projected annual income, reducing the amount of the insurance policy.
2. How long will they need the income? Age, health and life situation play a part in this decision. An elderly spouse or parent who needs extended care or a spouse with dependent children may need a lot. A young entrepreneur who just invented the next Facebook or has a great future may not need as much.
Making the initial calculation quickly gives you an idea of how much life insurance your loved ones will need to continue their lives. Making it easy is a helpful sales tool and a way for your prospects to make informed decisions.
Photo Source: Freedigitalphotos.net
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