Choosing Terms: How Much & For how Long?
by Jim Tobin, CFP
One of the most common questions I face as a financial planner is “How much life insurance do I need?” If you'd like to learn a simple yet effective way to go about choosing terms for life insurance, you are in the right place.
As a Certified Financial Planner or CFP, I have had some experience with using (and paying for) complicated software to get and illustrate a complicated answer.
It quickly became clear that people were not all that interested in print outs as thick as a phone book (you do remember the phone book?).
Turns out, most people simply wanted to know what they had to do to protect their goals. If you are in this situation, I have a simple yet effective formula for you to use.
The simple answer to the question “How much life insurance do i need ?" .... The acronym L.I.F.E.
Loans -- Add up all outstanding debt.
Income- Take your annual income and multiply by the number of years until you plan on retiring.
Future Expenses- Is there anything on the horizon that will incur a significant expense to plan for?
Education - Do you plan on paying fully or partially the cost of one or more children’s educations?
Adding these numbers together and adding a conservative annual inflation cost will give you a pretty good idea of your "gross need".
At this point you can subtract any savings and 70% of qualified retirement funds (unfortunately we have to be mindful of taxes). Additionally you can subtract any current, personally owned*,life insurance that will be inforce for a useful period (until an expense expires like college).
* I advise against using employer provided life insurance in this initial calculation, as there is no guarantee that a future employer will be able or willing to provide this benefit.
It is best to think of employer provided life insurance benefits as supplemental. This can be especially helpful if budgetary constraints force you into a less than "fully insured" position.
While this formula is very simplistic at it’s base, it allows you to comfortably make provisions for nearly any future expense.
Future expenses do not need to be perfectly planned, but rather, can be structured to accommodate multiple options.
Changing life plans need not disrupt your financial security.
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I think I have the answer to “How much life insurance do I need”, but for how long?
Next, you will need to choose a duration for your policy. The most common duration is 20 years. However there are term policies ranging from 1-30 years and permanent policies that do not expire as long as the premium is paid.
The best way to figure out duration is to look at the LIFE calculations and determine the duration of those expenses. Don’t be afraid to give yourself a cushion as things don't usually work out exactly as planned.
Okay, I have the amount and duration, what’s next?
If you are in good physical health, you can get an idea of cost by using the quote tool to your right.
Be sure not to check rates only for “best” class, as only 10% of applicants receive preferred best offer. A good practice is to do your initial budgeting based on “standard class” and be pleasantly surprised.
To Learn about the process of obtaining the best policy available for your situation click here.
If you have some health challenges, the quote tool is less effective and you would be better served by contacting us here.
Thank you for choosing the Life Insurance Help Desk to learn a simple yet effective manner for choosing terms for life insurance. Please look around the site and read about everything from life insurance basics to underwriting considerations for specific conditions.
We look forward to helping you protect the one’s that mean the most to you.
The time to get covered is now!