Life insurance is a simple tool that can be used to replace lost income when a wage earner dies unexpectedly. Most of us don't go to work every day to take care of only ourselves. Whether you have children, a spouse, or creditors depending on you, an early or unexpected death can prove to be detrimental. We are the money machine, our talents and skills don't exist independent of our physical application, so the paychecks won't keep coming in the event of an early passing. Life insurance is the selfless part of financial planning because it requires us to leave a means for our loved ones to live a good life with or without us. I have always referred to life insurance benefits as love letters with a check attached.
Let's dig in! Life insurance is designed to first replace our income. How much income, and for how long? That all depends on who is depending on us and what they are depending on. I have laid out 3 very common income replacement and protection scenarios for families with minor children, married couples, and families with debt. This is not to be considered an all-inclusive strategy. Working with a licensed professional will help you develop a protection strategy that is best for your family.
100% Full Income Replacement- If you have minor children consider replacing 100% of your annual income for as many years as these children are likely to depend on you financially. If you are a parent, you know that nearly every penny you earn goes to raising your kids especially in the early years everything they have comes from your ability to earn an income. In the tragic event of the early and unexpected death of a parent, children can suffer tremendously.
This is why I recommend protection by way of 100% income replacement until children reach full independence. Many will assume that means we only want to consider a plan until the age of 18. However, I recommend extending that to age 21-25.
No matter what society says about adulthood beginning at age 18, in reality, most of us provide financial support long after the 18th birthday. Financial support comes in the form of housing, food, clothing, healthcare, childcare, activities, and help for major purchases and getting adult kids out of jams. We can't help it. If they call for help, we are going to jump into action and that usually means pulling out the checkbook or the debit card.
For example, if a family has 3 children age 18, 12, and 6, and has an annual income of $65,000 the income replacement life insurance need is $65,000 x 19 years =$1,235,000 (assuming we provide for our 6-year-old until age 25). If there are 2 parents in the home the same calculation should be done on both parent's income.
What does this cost?
20 Year Term for $1.2 million costs about $85.00 per month for a non-smoking healthy male.
$65.00 per month for a non-smoking healthy female
(rates subject to underwriting, and other variables)
Income Replacement Through Retirement- Similar to the 100% full income replacement plan this is based on 100% income replacement through retirement. This is extremely important for married couples who plan to retire together. Always meet with a financial advisor to determine your retirement calculations. This way you know what you are planning for.
If you can't meet with one right away, try an online calculator like https://www.calcxml.com/calculators/retirement-calculator
to get an idea of where you need to be.
Once couples know their retirement nest egg goal, all that's left to do is fund it. The phase of life when we build our retirement nest egg is called the accumulation phase when we route as much income as we can afford into retirement savings accounts. When two incomes are contributing to the big plan, two incomes are needed to fully fund the plan.
An unexpected death derails the best retirement plan.
For this reason, I suggest married couples consider the number of years they have until retirement. Also, calculate the annual contributions each spouse is expected to make in that time frame. Once these numbers are known, apply for a life insurance policy that that will replace each spouse's contribution in the event of untimely death to ensure the plan comes into fruition no matter what.
For example, A couple, age 38 and 45 plan to retire in 20 years when the older spouse reaches 65 years old. In this scenario, the 45-year-old spouse earns $85,000 and the 38-year-old spouse earns $100,000 per year, they need 100% of this income in the next 20 years to pay off their mortgage, car loans, student loans, and save for retirement. $85,000 x 20 years = $1,700,000 and $100,000x 20 years = $2,000,000 in total they need almost $3,000,000 in income replacement protection to make sure the retirement dream happens even if both spouses don't live long enough to enjoy it.
Remember, I told you that life insurance is selfless, it's all about making sure your loved ones have what you planned for whether you are here to enjoy it with them or not, after all, they were depending on you, and life insurance makes sure you don't let them down.
What would this cost?
20-year term for 2 million costs about $125.00 per month for 38-year-old healthy female Non-smoker
20-year term for 1.7 million costs about $261.00 per month for 45-Year-old healthy male Non-Smoker
(Rates subject to underwriting, and other variables)
Debt Relief Income Replacement - Many families are debt-laden with mortgages, student loans, car notes, and credit cards. The only thing keeping families afloat is regular earned income used to keep up with monthly payments. If an income earner dies unexpectedly everything falls apart. In the debt relief income replacement plan the objective is to reduce the burden of monthly bills on dependents left behind. Often dependents are not financially capable to take on the remaining debt to sustain the lifestyle they have become accustomed to living. After a wage earner dies, dependents have to relinquish the assets back to the banks if they can't afford to pay the notes. This can result in the loss of housing and transportation.
"To avoid this, calculate the total of all debt owed and multiply it by the number of years expected to pay it all off."
For example, $200,000 in total debt with a 5-year car note, a 30-year mortgage, a 20-year student loan payment, you would cover the total amount of debt you owe $200,000 for 30 years which is the longest possible time the debt will be outstanding. This will replace the lost income needed to pay off any outstanding debt and provide some financial relief to a grieving family who has lost a breadwinner.
Imagine the peace of mind knowing the house, the cars, and the credit cards are all paid off at the time of death. This selfless gift would provide so much to those who are left behind. To make things easier ask your life insurance agent about how to assign the death benefit to the creditors so they get paid first.
In this scenario, you will very quickly have more death benefit from insurance than what you owe in debt.
That's not a bad thing. No family ever complained about getting an extra check at the time of death. These funds can be invested, or divided among dependents.
What does this cost?
That all depends on you. Follow this link to get a free quote in minutes to determine what it would cost to write a debt-free check to your loved ones. https://www.gofundyourlife.com/quote-apply-life-insurance
Please remember that life insurance is a love letter with a check attached. It is a very selfless gift for your loved ones to know you cared enough to protect them at all cost whether you are here with them or not.
We developed an easy chart to help you determine the 4 levels of life insurance protection factors to plan for. We have included it below. When you are determining the amount of coverage refer to this chart, and be sure to include any coverage you have at work into the total amount of protection. Be prepared to take a physical to determine your health status when you are applying for coverage in the million-dollar range. The longer you wait to apply the higher the cost of coverage. Allow us to help you today, quote and apply on your own: https://www.gofundyourlife.com/quote-apply-life-insurance
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