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Posted by on January 27, 2008, 12:21 pm
In the past, I have read that you should use the following formula as
a guideline to determine how much term life insurance you should
carry: 10 * annual salary. Recently, I read a formula that would
double that coverage result. That formula is ((.8 * annual salary) *
20).
As far as our situation goes, we're in our early thirties with 2
children under 5. We are saving as we should for retirement and
college funds, but I'd like to know which formula would be a better
idicator of how much coverage we should carry. Thanks in advance.
HH
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Posted by on January 27, 2008, 1:01 pm
hh_online@mindspring.com writes:
> In the past, I have read that you should use the following formula as
> a guideline to determine how much term life insurance you should
> carry: 10 * annual salary. Recently, I read a formula that would
> double that coverage result. That formula is ((.8 * annual salary) *
> 20).
Formulas like that are pretty worthless. First you have to
ask yourself what the insurance is for. Then figure out how
much money will fix the problem that the insurance is meant
to solve. If your income is $100,000 but you have an
investment portfolio worth, say, $2million, it's entirely
possible that your only "need" for that insurance may be
to help with potential estate taxes, not because the folks
you leave behind will be strapped for cash.
If you wanted insurance to provide a permanent replacement
for your current income, you could argue that it ought to
be as much as 25 times your income. If you only want that
insurance to provide money to replace, say, 10 years of
your income, you actually might do just fine with even
less than 10x your current income (on the assumtion that
most of it will continue to be invested and grow).
> As far as our situation goes, we're in our early thirties with 2
> children under 5. We are saving as we should for retirement and
> college funds, but I'd like to know which formula would be a better
> idicator of how much coverage we should carry. Thanks in advance.
Neither formula answers the question. What are the
expenses you need for that insurance to pay for in
your absense?
Some things folks often take into consideration - for
the working spouse, salary-replacement. For the spouse
who is not earning a salary (I hate to say non-working),
money to pay for daycare and/or a nanny, etc. etc. Folks
often want to make sure that the house can be paid off
so that the surviving spouse has one less huge ongoing
expense (mortgage) to contend with. Other things you
may want to fold in are expected college expenses so
that, again, the surviving spouse has one less ongoing
expense (saving for college) to contend with. Neither
your mortgage nor college expenses necessarily have
any specific relation to your current salary.
Anyway, while there are some other things for which
folks can often get by with a quick rule of thumb,
life insurance is not a great one to fake it with.
Even if you're going to compute income replacent
rather than needs-coverage, the computation is
still not a simple multiple of your income, and
it's rather inadequate when used for non-income
producing spouses (or even for income-producing
ones who contribute in ways beyond the salary).
--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting
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Posted by Chris Cowles on January 27, 2008, 1:18 pm
> As far as our situation goes, we're in our early thirties with 2
> children under 5. We are saving as we should for retirement and
> college funds, but I'd like to know which formula would be a better
> idicator of how much coverage we should carry. Thanks in advance.
When we bought insurance we didn't use a standard formula. Because
both of us work and earn essentially the same amount, either of us
could sustain the family if the mortagage were paid off and college
paid in advance. That's what we based our coverage on and we're
confident that it's adequate in our circumstances.
We're covered individually for the same amounts. Should we both die,
the kids get that plus equity in the house. It's more than enough for
our designated relative to see them through college and give them a
boost after that.
--
Chris Cowles
Gainesville, FL
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Posted by Mark Bole on January 27, 2008, 1:21 pm
hh_online@mindspring.com wrote:
> In the past, I have read that you should use the following formula as
> a guideline to determine how much term life insurance you should
> carry: 10 * annual salary. Recently, I read a formula that would
> double that coverage result. That formula is ((.8 * annual salary) *
> 20).
That would be times 1.6, not double.
>
> As far as our situation goes, we're in our early thirties with 2
> children under 5. We are saving as we should for retirement and
> college funds, but I'd like to know which formula would be a better
> idicator of how much coverage we should carry. Thanks in advance.
I count four "should's" in your message. There is no right amount you
"should" carry, just what matches your comfort with risk, which only you
can determine.
Will you and your spouse unexpectedly die together, or just one of you?
Should the lifestyle of surviving orphans and widow(er), if any, go
up, down, or stay the same? Should government payments and college aid
be relied on? Will there be a re-marriage, or other relatives available
and willing to help raise orphans or single-parent children? The list
goes one...
What amount of term life coverage do you have now? Why do you think you
should change it? Have you accomplished the more difficult task of
talking with and selecting, in a legal document, a designated guardian
for your children? How much coverage does that person think you should
have?
Take the two formulas you read, and apply a formula which averages the
two results (13 times annual salary), then make a change only if your
current coverage is more than 20% different from the result.
-Mark Bole
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Posted by on January 27, 2008, 2:24 pm
Mark and others:
Thank you for the responses.
I should have conveyed that I understand that there are no hard rules
concerning how much coverage people should have. Currently, I make
72K/year and have 500,000 in coverage. My wife works and makes almost
the same exact amount annually and also has same amount of coverage.
I feel that we are under-insured by either one of my previously stated
formulas and I guess I look at life insurance like this: If something
happens to one of us, we can raise the children under the same
standard of living as well as include college for them. Also, if
something happens to both of us, the couple we've designated as whom
our children would go to, would also be able to raise them on the same
financial level.
I understand that the answer to my question isn't straight-forward,
but I am currently not comfortable with our current coverage.
This is an invaluable forum. Thank you for the opinions.
HH
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