You can't put a price on love. But isn't that what life insurance companies ask you to do when you choose your new policy's face value? Luckily, the dollar value of a policy doesn't reflect how much you love someone. It reflects the insured person's contributions to the family income, and the hardship the remaining spouse and children would face if the other died unexpectedly.
It doesn't sound very romantic until you stop to think...insuring yourself means you want to take care of your loved one even after you're gone. It means your love is forever. That sounds pretty romantic to me!
Let's take a look at how to figure out how much life insurance you need.
I'll show you a specific example of how a life insurance agent figures out how much insurance you need. I'll use a couple named John and Jane to show you how it works.
Step 1: What is your annual income? How many more years until you retire?
Let's say John makes $50,000 a year, and is 35 years old. He'll retire in 30 years. Most of the time, I advise clients to factor in a 5% annual income growth rate, due to raises, promotions, cost of living increases, and similar factors. It's likely you'll make more money over time, which represents an additional financial hardship for your spouse if you pass away at a higher earning rate.
Step 2: Which tax bracket are you in?
John's annual income lands him in the 25% tax bracket. As his salary grows, however, he might get bumped up into a higher bracket. All of these things are going to affect how much he contributes to the family finances.
Step 3: How much do you have in savings or other assets?
John has $10,000 in savings, and $50,000 in his retirement account.
Step 4: Calculate the total income expected over the years you expect to work.
There's a lot of math involved in this step. It involves multiplying John's yearly expected salary by the number of years he expects to work, taking thing like the tax bracket and income growth rate into account. It's usually easier to have an agent like me do this part for you. In John's case, the math adds up to $2,003,605.16.
Step 5: Subtract your assets from Step 3.
$2,003,605.16 - $60,000 = $1,943,605.16. That's a very rough estimate of how much life insurance John will need.
Step 6: Talk to an agent about getting covered.
There are lots of other factors to consider that don't fit neatly in a 6-step process. If John and Jane have kids, for example, the family's expenses will be a lot higher than they would if it were just the two of them. That's why agents like me are here to help!
There's a policy that's right for every couple, and I can help you find yours. Give the love of your life the peace of mind that only life insurance can bring.