We should know that life insurance is an important part of any financial plan. At The Joseph Group, we do not sell life insurance but just like mortgages, long-term care and estate planning, we help our clients think about and plan for their life insurance coverage. Life insurance can be a valuable tool to help you plan for the financial future of your loved ones should you get “hit by the beer truck” before you have the opportunity to save sufficient assets during your working years. Although every situation in unique, there are several rules of thumb when it comes to deciding how much life insurance coverage to have. One formula I like to use is DIME. Let’s look at a quick example using Marge & Homer:
Debts: Total all of your debts (but not your mortgage): college loans, credit, car loans, etc.
- Marge & Homer have $35,000 in college loans, $7,000 in credit card debt, and $26,000 in car loans.
- Total $68,000 in debts (not including mortgage).
Income: You should want to provide enough income replacement to allow your family to maintain their lifestyle in the event of your death. Someone with younger children will want to provide about 20 years of income replacement, for older children plan on about 10 years of income replacement.
- Marge & Homer have 3 children, Bart (10), Lisa (8) and Maggie (2). Homer works as a Nuclear Engineer and makes $60,000 per year. Marge works part-time outside the home and also provides an important role in running the house. If something were to happen to her, Homer would need to hire someone to do all of the jobs that Marge provides – DO NOT underestimate the value of a non-working spouse – they could need just as much insurance coverage as the working spouse.
- With Maggie being only 2, it would be wise to have adequate coverage until she is out of the house – about 20 years.
- Income preplacement total: $60,000 x 20 = $1,200,000.
Mortgage: Add Marge & Homer’s $170,000 mortgage balance.
Education: Bart will probably not attend college, Lisa and Maggie likely will, but we should provide for all 3. So: 3 x $100,000 = $300,000.
Debt: $68,000 Income: $1,200,000 Mortgage: $170,000 Education: $300,000 TOTAL: $1,738,000
Next we would subtract any assets that Marge & Homer have saved and any group life insurance coverage through an employer. Marge & Homer have $75,000 in savings (outside of retirement accounts) and they have $180,000 in Group Life insurance through Homer’s employer.
DIME Total: $1,738,000 – Total Assets: $255,000 = $1,483,000 – round to $1.5M life insurance for each
There are of course other considerations that can change the coverage amount, such as any wishes to leave an inheritance to the children, charitable giving, business buy/sell agreements, etc., but this is a great starting point in most cases.
Like other aspects of financial planning, life insurance planning can play a very important role in your financial plan. If you have questions about insurance coverage, please contact The Joseph Group, we are here to help!
Written by Dave Suchland, Client Advisor & Team Leader