No one wants to pay for coverage they don’t need. But figuring out how much life insurance you really need can be an eye-opening task.
People ask me to quote a life insurance policy for between $100,000 and $250,000 all the time. In the 1970’s this may have been enough. But the example below might give you a different perspective on how far $250,000 will really go.
The Story of Bob and Andrea (a very possible scenario…)
Bob works as a manager at a local warehouse in Salt Lake City, Utah. He makes $56,000 a year, before taxes. Bob has a wife, who stays home with their three kids.
Bob is tragically killed in an accident when his kids are 4, 5, and 7 years old. Bob had just purchased a $250,000 term life insurance policy. His final expenses are $8,000, which is conservative. The $8,000 is paid for out of the life insurance benefit. Now Andrea, Bob’s wife has $242,000 left. She hasn’t had a job in over 7 years, and needs to pay the bills and take care of herself and her three children. This family has lost their entire income. Let’s assume that the kids plan to be in the house another 14 years. So, the youngest will move out when they are 18, the next oldest, 19, and the oldest when she is 21. Andrea plans on using the life insurance benefit to stay at home and raise her kids. So, is that a realistic expectation?
Andrea has $242,000 left. Without investing any of this money, She will have an annual income of $17,285.71 for the next 14 years. This is about 31% of Bob’s income. Andrea has $3,000 in monthly bills (house, car, food, gas, electric and other basic expenses). $17,285.71 gives her $1,440.48 each month; not even enough money to pay half of her bills.
Andrea is forced to get a job and put all three kids in daycare all day, or after school. Daycare, at $15 per child (a conservative estimate) for three kids each work day of the month, costs Andrea $990 per month. Andrea new job pays her an entry level $30,000 per year, because she hasn’t worked in 7 years. Nearly $12,000 of her annual income is eaten up in daycare costs. This leaves her and her three children with and $18,000 a year income, plus the annual life insurance benefit of $17,285.71; totalling $35,285.71 each year. Not bad, but only 63% of what the kids and her are used to living on. The worst part is that she is working 40 hours a week, robbing her of the opportunity to raise her kids as a stay-at-home-mom.
What if Bob’s life insurance benefit had been one million dollars?
Using the same example, let’s say that Bob had purchased a $1,000,000 term life insurance policy. After he was gone, and the final expenses were paid, Andrea was left with $992,000. This gave her an annual income of $71,428.27, or $5,952.38 per month. Andrea was able to pay the bills of $3,000 easily each month and stay home with her kids.
What if Bob’s life insurance benefit had been one hundred thousand dollars?
Just for kicks, let’s find out what would have happened if Andrea would have only received $100,000. After Bob’s final expenses were paid, she would be left with $92,000. Over 14 years, that leaves her with $6,571.43 per year, or $547.62 per month, barely enough to pay for groceries for the four of them.
The point? Andrea was able to continue a similar lifestyle with Bob having $1,000,000 in life insurance benefits. Anything much less, and her lifestyle was drastically changed. The difference in monthly premium for Bob to have $1,000,000 instead of $250,000? $35 per month.
To calculate how much insurance you may need, please use this Quick Life Insurance Estimator.
Or, for a really quick way to get an idea of how much life insurance you need, read How Much Life Insurance is Enough?.
*The example above doesn’t take into consideration Andrea investing her money, the kids college expenses, or some taxes. However, it illustrates a point that a quarter million may not be as much as it sounds like, when put into a family’s real scenario.
