Life insurance is the most important product I offer. Cars can be fixed, houses can be rebuilt but the financial hole left by the death of a loved one, can change the course of your life.
Life insurance by nature, was invented to be an income replacement tool. There are only a few ways to replace an income. Get a job, inherit a lump sum of money, or have enough money to be able to invest and have the money work for you.
If a primary wage earner dies and leaves behind a spouse and dependents, what will the monthly expenses be to keep the family going? There is a simple equation I use to help determine how much life insurance is needed.
Annual expenses, divided by .05= amount of life insurance. Here is an example:
Let’s say a family’s monthly expense is $3000. This would cover the mortgage, the car payment, groceries, gas, clothes, bills, etc. Annually that would be $36000 that you would need to replace. If you had a lump sum of $$ that you could invest to earn $36,000, you could replace that income. You should be able to get 5% return in a conservative investment so the numbers would look like this:
36000 divided by .05 = $720000. A $720,000 life insurance policy, if invested would return $36,000 year or $3,000 month.
The best thing about this strategy, is you will never run out of that $3000 per month and the $720,000 will always be there.
The thing couples seem to forget, is that if you die early and leave enough money to support the family until the kids get out of the house, then what? If you run out of money once the kids leave the house, what will you do for retirement? You’ve lost out on some of the prime wage earning years of your life. You may have very little set aside for retirement and will be behind on setting enough aside to have a comfortable retirement.