Life insurance may not be the cheeriest topic, but it’s an important one. It’s essential to have the proper life insurance policy – at the proper amounts – so you’re well-prepared in case of a worst case scenario.
One important step is determining the right amount for your life insurance policy. There’s a handy table you can use that provides the formula, which is a factor of your age and income. If you’re between ages 18-40, the formula indicates that your life insurance policy should be 30x your income. As you age, your income ideally increases, and the formula considers that. So, when you’re between ages 41-50, the policy should be 20x your income. For 51-60, it’s 15x and between 61-65, it’s 10x your income. For ages 66 and older, it should be a multiple of your net worth.
But people shouldn’t just follow this formula and assume they’re all set. The formula is meant as a guide. It’s actually a smart idea to work with a financial advisor to ensure you’re properly covered based on your specific circumstances. For instance, we could meet with a client and, based on their situation, recommend a life insurance policy of $1M because they have a mortgage on their home, a car loan, and so forth. We’ll conduct a needs analysis to determine the bare minimum they’ll need to cover their expenses. But, a few years later, we’ll need to revisit this, especially if the client has had life changes. If they’ve had children and bought a vacation home, that $1M is no longer enough to keep them properly protected. Keep in mind that this policy is not meant to cover just a few of your expenses. It’s meant to cover the value of your income. You have to consider what you would generate if you were alive and working.
When you work with a financial advisor, they’ll help you figure out what’s the right amount for each stage in your life. This may sound morbid, but at Guyton-Forge, we virtually kill people off using a simulator we have. And we ask each client questions to help determine what they need. Do you want to pay off the entire mortgage or would you rather have a reserve fund? Do you want to set aside money for your kids’ education? Do you think you’ll need more or less if your spouse passes away first?
And since it’s such a heavy topic, we try to lighten it up when we can. For instance, during this exercise, we ask clients if they want to have a chicken wing or prime rib funeral, which helps determine how much money they’ll need for it. We ask them to consider: if one spouse dies, would the surviving spouse have enough money for their retirement.
Also, think beyond just paying off your home and your car. Consider the transition costs, as well. Will your children need counseling to manage their grief? That expense is not necessarily covered by insurance. If a spouse was the children’s primary caregiver, you might need to hire a nanny or someone to take care of the house. There are lots of costs to think about beyond just the basics.
A question that we hear frequently is: can you be over-insured? And the answer is no, the insurance companies won’t allow that. You’d be sleeping with one eye open because, in that scenario, you’d be worth more dead than alive. Think of it this way, insurance companies won’t allow you to insure your 2004 Toyota Corolla like it’s a 2023 Lamborghini. Why would they? Then you’d crash your Corolla, get a huge payout and buy a Lamborghini, right? The insurance companies would never allow that to happen.
Also, recognize that this is not a “set it and forget it” type of thing. It’s definitely something that you need to revisit periodically. Don’t go more than a few years without reviewing it with your financial advisor. Based on your life’s circumstances – salary, lifestyle, whether you have kids, whether you recently bought a boat or a second home – you might need more or less. Salary and situations change, so monitoring is a huge piece of it.
While we recognize that talking about life insurance is no one’s idea of a good time, it’s important to have these conversations and prepare for the worst case scenario. Everyone should have the proper protections in place so that their families are well taken care of, just in case.
