Go to Jeff Salisbury LWGate Home Page.From: Paul Maffia <paulmaf@eskimo.com>
Subject: Re: How to calculate life insurance needs
Date: Thu, 3 Dec 1998 16:05:21 -0800 (PST)
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On Thu, 3 Dec 1998, Mark Nowak wrote:
> Hi,
>
> I'm having some trouble determining how much life
> insurance I should have. I'm almost 32, married,
> hope to have kids and a house in the next few years
> and a mother I look out for (I'm an only child and
> she's alone). I have savings from over 9 years of
> working.
>
> Of course, I want term.
>
> I don't want to buy more insurance than I need.
>
> So how does one take savings, age and beneficiaries
> (wife, mom and future kids) into account to come up
> with an amount?
>
> I read somewhere that a good rule of thumb is 6
> times your annual salary, but I figure that assumes
> no savings and does not count the number of
> beneficiaries.
>
The problem is that rules of thumb are usually worthless as using them
will usually either give you too much or too little for your actual needs.
For example, say you have a salary of $50,000. You rule of thumb would say
you need $300,000. But $300,000 reasonably invested will only yield about
$18,000 in income. So even if your survivors used principal to maintain
that $50,000 per year life style and it was invested so it earned 10%, it
would only last 9.6 years. Hardly enough.
To properly calculate the need you need to make some decisions and
assumptions.
Will your wife work if you shoudl die? If yes, how much can she earn?
If you answer not until the kids are grown and on their own, that is a
different ball game.
Have you worked enough to qualify for survivor's social security benefits
while the children are under 18? If so, what is the total SS benefit
projected for your family per year.
If not a sum will have to be added to make up for that.
What do you think the inflation rate will be?
Do you want your widow to hit the jack pot and never have to work ever
just because you died? With an income of about $50,000 you would probably
need close to $1 million in coverage to accomplish that.
Let me throw anohter curve at you. What would you need in the way of
coverage on your wife to cover what you will need in extra income to
replace what she does for you like taking care of Mom and the kids while
you work?
It is not as easy as using a rule of thumb.
Paul M.
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