We often get through life by making educated guesses.
You’re fixing dinner, using a recipe you’ve never used and suddenly realize you don’t have the rosemary leaves the culinary website or cookbook calls for. So you use basil and hope for the best.
You’re picking out a shirt or jeans at a store. You don’t have time to try it on, or just don’t feel up to it. You buy it, pretty sure it’ll fit.
You’re driving pretty fast. There’s a yellow light. You quickly mull over whether it’s better to barrel through it or slam on the brakes.
And from what I’ve seen, we do the same thing with life insurance. We pick a nice round number that sounds good, and if the premiums are affordable, we go with that.
There’s nothing wrong with making an educated guess if it’s really backed by some education.
Plenty of people tweak recipes, buy clothing and navigate yellow lights without their lives falling apart. Sometimes the stakes are pretty low — messing up a meal — and sometimes they can be high (you may get through the light fine, but you may not).
Still, we get through life because of our educated guesses. If we didn’t make them, we’d never make any decisions in life.
We wouldn’t settle on a major in college, choose a job, get married, or choose to have kids — because we’d never have enough information to feel confident enough to push forward and seize one of life’s many paths.
But, boy, I’d like to see people think a little more, and gather a little more information, before they buy a life insurance policy.
I’m not the only one who feels this way. “Very few people really do the type of analysis that they should be doing with life insurance,” says Martin M. Shenkman, a personal financial specialist and certified public accountant in Paramus, New Jersey. “They just pick a round number that sounds good. That’s very arbitrary for what might be the most important financial decision you make.”
He adds, “People will spend an incredible amount of time picking out a car. Well, I think life insurance a little bit more important than your new car. I admit it’s not as cool as your new car, and it’s not as much fun of a purchase, but God forbid you bite the dust.”
And it isn’t just that people are under-insured themselves. It can go both ways.
“I’ve seen people over-estimate it,” says Michael Goodman, a certified public accountant and personal financial specialist with Wealthstream Advisors in New York City. “But more often than not, they under-estimate.”
Neither may be the worst thing in the world. If you’re over-insured, you are wasting money — but if something does happen to you, your beneficiaries will probably be glad you overcompensated on life insurance. If you under insure your family, assuming your spouse makes a good living, and your kids are old enough that they’re going to be earning a living in the near future, everything will probably work out well enough. And certainly under insuring is better than not insuring at all.
But what if your spouse makes nothing close to what you make — and something would happen to you when you’re young? After the money runs out, would your spouse have to take on two jobs? Would your family eventually have to sell the house and downsize? Would there be enough money around to send the kids to a good college? It’s that sort of misfire in educated guessing that can destroy, well, your kids’ education.
So How Do You Calculate How Much Life Insurance You Need?
Fortunately, it isn’t that hard, but it does take some thinking. And the more thinking you do, the better off your family is going to be.
Goodman says that there are usually at least three factors you’ll need to consider. “They probably won’t apply to everyone,” he adds.
Debts To Be Paid Off
“First, are there any debts that you have that somebody else would be responsible for?” Goodman asks, citing a mortgage. If a car payment is often in the mix, however, you’ll probably want to include enough money to pay that off, and if you have a lot of credit card debt, you’ll definitely want to think about having enough life insurance to pay that off — especially if your spouse is a co-signer.
“I’ve seen people get out of it,” Goodman says, “but if the credit card companies will try to come after the spouse and kids and get money out of the estate, if there’s money there.”
OK, so you probably do want to think about those credit cards.
And don’t forget about student loans, if you or your spouse still have significant debt that you’re paying off.
Responsibilities In Life
“Secondly,” Goodman says, “you want to think about any responsibilities you have, like college for your kids that you want to make sure are funded.”
And something to keep in mind, if your children are young. As expensive as college is today, it’s going to be far worse 10 or 20 years from now. You want to be thinking about what a college education may cost when your kids are ready for college and not what it would cost now.
According to a year-old Bloomberg article, college costs have climbed 500 percent since 1985. (Depressing stuff, right? I think this is why I’m not invited to more parties.)
It’s no secret that college is more expensive than ever nowadays, and it is not uncommon for college graduates of the 21st century to be saddled with debt that will last for decades.
If you’re like most parents, you’ve probably already started saving for your child’s education, but whatever amount you do end up saving probably won’t be enough (tuition costs have been going up every year, going far beyond normal inflation rates). So, you’ll naturally want to factor college expenses into your life insurance value.
The Cost of Tuition
The best way to determine how much your child will need for tuition is to look at the current average tuition amount(s), and then adjust it for inflation for when you anticipate they will actually be going to college. Now, since tuition rises have not exactly adhered to normal economy inflation for the past few decades (especially within the past 10 years), this is challenging. However, what you can do is examine the annual rises in tuition costs specifically, and make an estimate from there.
The Age of Your Child
Calculating how much tuition your child will need is harder the younger your child is. This is because, if current patterns continue, it is going to be much more expensive than it is now. For example, average tuition costs have more than doubled in the past 20 years. If you have only recently become a parent, tuition could very well be double what it is now by the time your child is in college. So, you should revise your insurance policy amount periodically as your child ages.
“Thirdly,” Goodman continued, “is there anybody counting on me for any kind of income stream or help over time? That could be a spouse who doesn’t work, or it could be a parent or sibling who depends on you, and of course, if you have kids.”
Goodman says that you should calculate whatever those numbers come out to be, and then look at what’s in the bank account (and will likely stay there). Whatever the difference is, is what you need.
Another Way To Look At It
Shenkman suggests getting enough insurance so that your beneficiary can put it in an account and live off the interest.
I know that’s going to be too steep of a goal and price for a lot of families — for instance, Shenkman says that would probably mean buying a $2.5 million life insurance policy if you want your family to live off $100,000 a year — and he concedes that it’s not going to be necessary if your spouse has a high-paying job that he or she loves.
Still, it’s that type of thinking that’s so important if you want to make a good attempt at getting the right amount of life insurance you need.
Other Factors To Consider
You may not feel you can protect your family from every financial emergency through your life insurance, but keep in mind that your spouse could be laid off from her or his great job. And if so, is he or she is the type of industry where you can bounce back easily? Do you want to contribute to your kids’ weddings? Do you want to help out your parents if they’re aging and struggling?
You don’t want to spend so much on life insurance, of course, where you’re in a situation that you have a possible financially awesome future set up for your family — but as long as you’re alive, you’re all going to be in the poorhouse. You want premiums that you can manage just fine, and it may be that you can’t budget for every possible scenario your family may face in the future.
But I’m just bringing up all these possible expenses because you never know what might happen, and if you want to help your beneficiaries, and you’re in the financial position to do so, you need to be thinking far beyond simply picking a big round number that sounds good.
And, really, planning and thinking about how much money your family might need if you’re gone is a great way to help you, now and later, with your future budgeting. In any case, however you figure out your life insurance payout, just make sure your educated guess is more educated than simply a guess.
After all, you can return those jeans if they don’t fit. But if something would happen to you, and your family realizes that your life insurance policy was way too small, there’s no returning it for something bigger. We can calm your fears by helping you with a life insurance final expense policy from the best rated term life insurance companies that will take care of your funeral costs and put your mind at ease.
Perhaps you’re older and wondering if you can get life insurance quotes over 60. If so, we can answer your questions and help you get the coverage you deserve.
Call us today for a quote at 1-888-552-6159.