After spending most of my work life, over 20 years, in the health and life insurance business, I still find the average consumer has no idea how to do life insurance mathematics. According to LIMRA’s research, the authority of the life insurance industry, over 30% of US households do not have life insurance. A staggering 55% of US households or 58 million people admit they do not have enough life insurance and need more.  Not only are average US families not buying enough life insurance but those households that do have life insurance have had their face amounts decrease over $30,000 average since 2004. The most alarming number comes from a survey stating that 70% of US households admit they would have serious financial problems if the primary wage earner were to die within just a few months including 30% of households admitting their problem would be immediate. Let’s explore your life insurance mathematics.

The first formula to life insurance mathematics is to calculate all of the primary debt the family has accumulated. Include the mortgage payoff, vehicles loans, credit card debt and consumer debt and loans. Next if there are minor children involved, how much will it take to educate them? If you have started a college savings plan, how much would you be short if you died today? If you haven’t started saving for college, what will it take to educate your child/children? Do your homework on the college your child wants to attend. The fees vary from $9,000 per year for in state students to over $25,000 per year for private institutions. Regardless, you will want to relieve the debt from your loved ones if you pass today.

The next formula to calculate is income replacement. This is the simplest calculation to do to replace your income. Keep in mind the debt will be paid off. If you take 10 times your annual income, invested properly at 7-8% rate of return long term, your family can live financially the same as if you were still alive and earning your annual wages. For example, if the primary wage earner makes $75,000 annually, the formula would be to purchase $750,000 face amount plus the total debt. With $750,000 properly invested with an 8% rate of return long term, the $75,000 annual income would be replaced with the interest from the proceeds because the mortgage and other debts would be eliminated. This calculation would insure income for the family without ever touching the original $750,000. To figure out which type of life insurance policy to purchase and how long of a term would be needed, we recommend reading this article Life Insurance 101. If you need help reading your new life insurance policy we recommend reading this article How To Read a Life Insurance Policy.

This may seem to be a very simplified use of life insurance mathematics example, and it is. Most American households only need this formula to protect their loved ones in case of a sudden death. Remember if most Americans knew how to do this calculation, 70% of households would not be underinsured.  We do recommend using an independent experienced life insurance broker to find the right product at the right price for your unique situation.

“If a child, a spouse, a life partner, or a parent depends on you and your income, you need life insurance”.—Suze Orman

Image by at renjith krishnan www.freedigitalphotos.net

yourfriend4life.com

Tim Wilhoit is owner/principal of Your Friend 4 Life Insurance Agency in Nashville, TN. He is a family man, father of 3, entrepreneur, insurance agent, life insurance broker, salesman, sales trainer, recruiter, public speaker, blogger and team leader with over 26 years of experience in sales and marketing in the insurance and beverage industries.