A great deal of individuals purchase life insurance without ever analyzing the correct amount of insurance they should have on their lives. It is common for people to purchase a one million dollar twenty-year term life insurance policy because it sounds just like a nice, round number. When it comes to the correct amount of life insurance a person should have, a lot of financial advisors will generally say that people should have anywhere from seven to ten times their income on their policy. So, someone who makes $100,000 per year should have a one million dollar life insurance death benefit. But, lets do some quick math; if you take $1,000,000 and invest it conservatively at 3.5% per year, that will only generate $35,000 per year of interest. Of course, the beneficiary could start eating into the $1,000,000; but at some point, there will be nothing left. The correct amount of life insurance in this case would be more like $2,500,000, in order to generate $100,000 of missing income (at a 3.5% interest rate). When it comes to income replacement, make sure you have the correct amount of life insurance to adequately provide for your loved ones.
Term Laddering
Another concept relating to the correct amount of life insurance is “term laddering.” Term Laddering defines a situation where someone will take out multiple term policies for different periods of time. An example of term laddering for a 35-year-old who needs 5 million of life insurance could look like this:
- 30 year level term 1 million $70 per month
- 20 year level term 2 million $75 per month
- 10 year level term 2 million $45 per month
The basic idea is that as time goes on and the individual accumulates more wealth, the less life insurance coverage they will need. Meaning after ten years, the individual in question only needs three million dollars worth of coverage so they let the ten-year term policy lapse, and after twenty years they let the twenty-year term policy lapse. At age 65, this individual could be in a financial position where they have enough assets, retirement accounts, home equity, etc., where life insurance is no longer a necessity. The life insurance was in place to hedge against the individual dying too soon, and now there is no need for income replacement.
Getting the correct amount of life insurance in place for the right amount of time is extremely important. Pacific Insurance Group, based out of Bellevue, Washington, has a team of expert life insurance agents who can help you get the best life insurance strategy in place for you and your loved ones. Visit www.pacificinsurancegroup.comfor an instant life insurance quote and or call 425-246-4222 to speak with someone at the office.
