Estimating life insurance needs
About this video
The video explains why people with dependants need life insurance and shows two ways to estimate how much. A quick rule is 10 to 15 times income ($500,000 to $750,000 on $50,000). A more detailed method adds funeral costs, mortgage, other debts, a college fund and lost income ($585,000), then subtracts savings and existing group insurance to reach about $490,000.
You'll be able to
- explain why someone with dependants might need life insurance.
- estimate life insurance needs using the 10-15 times income rule.
- estimate needs by adding expenses and subtracting existing assets.
Key words
- Life insurance
- A policy that pays money to your family or others if you die.
- Dependants
- People who rely on your income, such as children, a partner or elderly parents.
- Group life insurance
- Life insurance provided through your employer.
- Final expenses
- Costs after a death, such as the funeral.
Transcript
- [Instructor] We're now going to talk about one of my least favorite topics, but also maybe one of the more important ones, especially if you have a family or people who are depending on your income, and that's estimating life insurance needs. Now, it's probably not surprising.
The reason why I don't love talking about it is no one likes to talk about death and especially their own death. But once you have people who depend on you, this is something that you should think about. Let's say for example, you have a young family, and right now you're supporting that family making an income of $50,000 a year.
You don't wanna think about it, but if heaven forbid, you got hit by a truck or something bad happened, you were to pass away, how would your family support themselves? How would they pay continue to pay the rent or pay the mortgage? How would they put food on the table?
It might be even something as basic as your funeral, which is more expensive than you might imagine. What about your kids' education? Do you wanna put some money aside for them to go to college on top of grieving for you? You don't wanna put all of that other burden on them.
So that's what life insurance does. It says, okay, in the horrible event that you die, at least your family will get some money in order to hold them over. Now, there's a couple of ways of estimating life insurance needs. One is to say, all right, maybe just do 10 to 15 times income.
So for example, if I just said times 10, this would be equal to $500,000 of life insurance is what you would need based on this very simple estimation. If you said times 15, it would be $750,000. Now, when you're younger, maybe you have a young family, you have many years left on your mortgage.
Your kids have a long way need that, need support. You're normally going to want to have a larger number here, and that might make this number larger. But the good news is, when you are younger, life insurance also tends to be cheaper. So when you go to the, you know, compared to if you were 10 or 20 years older, and I've experienced this recently when I tried to get new life insurance, as I aged it definitely got dramatically more expensive.
But this would give you an estimate. If your kids are, if some of them are already adults, already went through college, et cetera, et cetera, you might be able to, maybe you've paid off most, if not all of your mortgage, then you could argue that this could be a lower number.
Now, there's ways to do it where it's a little bit more precise or a little bit more exact. Let's say that we estimate that it's $15,000 for funeral and final expenses. I'll just write funeral, funeral, et cetera, right here. All of the things that need to happen after someone dies, and I know it's not pleasant, but there's a lot that has to go on.
Let's say you have $220,000 left on your mortgage. It would be nice if your family did not have to worry about that mortgage anymore and could pay it off. Let's say that there's $20,000 in other debts. Other debts, maybe these are credit card debts, maybe this is a car payment.
Maybe you wanna set aside $80,000 for your children's college fund. College fund. And it's not just about children. Sometimes you might have siblings or elderly parents or someone else that, or a spouse, a partner that needs support. So once again, think about those as well.
This is no by no means comprehensive. And then on top of that, of course there is the lost income. So, so let's say that you want five years of lost income. So, and you'd probably want more than this if your family is very young or if your partner does not have a career that can support the entire family.
But let's say we do 250,000 here, 250,000 for five years, lost income. So if we were to total all of this together, and I did this ahead of time, I'm reasonably good with mental math, but I don't wanna make you think that I was able to do this in a second. But this comes out to $585,000.
Now, if you don't have any assets or any other insurance policies, then this is what you, you want your life insurance payment to be. Maybe you get a $600,000 policy. Now, you might be able to say, if you want to be precise, maybe there is $35,000 in savings, 35,000 in savings that you already have, and maybe your work provides a $60,000 group life insurance, group life insurance.
And so you'd say, all right, this is $95,000 here. Maybe I can subtract that out, so minus, let me write this. So if I take that 585K minus 95K, that gets me to 490 K. So that got us to a very similar place that we had before, maybe a $500,000 policy. And most of us don't like thinking about this, but if I had to err, I would err on the side of a larger policy because once again, in the horrible event that something happens to you, you want your family taken care of.
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