Over the last few years my income has changed rather steadily and we’ve had another baby. So it’s time to re-evaluate my life insurance coverage.
I view insurance as protection to my family in case I should suddenly die. I want to ensure that my wife and children are adequately taken care of and that they are not unnecessarily burdened as my income is a significant portion of our household income. I do not view insurance as a windfall for my family, but simply a mechanism to replace certain obligations that I have and will cover through the years.
In looking at the major categories of expenses I will look at my family’s immediate needs, future income needs and account for existing resources available to cover these expenses. The analysis also include existing resources available that can be used to offset my family’s need.
Life Insurance needs
|Final Expenses (Funeral etc.)||$10,000|
|Pay Off Mortgage||199,800|
|Total Immediate Needs||$303,900|
|Total Future Needs||$436,600|
|Other Personal Assets***||20,000|
|LIFE INSURANCE NEED||$669,500|
I have three kids: Two teenagers and a two year old. In today’s dollars I’m figuring that tuition will cost $8,750 per year or $35,000 for a full four year term. The two older children are 1 and four years away from college and thus I am not willing to put their college funds at a significant risk. Therefore I am assuming a return on investment of 5% and inflation of 3% for a real rate of return of 2%.
For the 17 year olds present value cost is $32,700 and the 14 year old’s projected present value is $31,400. The baby has a longer time frame and I’m projecting an 8% return with 3% inflation. The present value of her education fund is $13,600.
If I were to pass away today my family would no longer be burdened with my living expenses. I anticipate my wife could easily live off of 60% of my current after-tax income of $30,000. She is 36 years old now and I would like to ensure she is taken care of until at least the baby is through college. I expect she would need additional for at least 25 years. Using the same assumptions as for the two-year-olds education fund, the present value of the income replacement is $423,000.
Other Personal Assets
These are personal items that could be sold if I were to die. These include things like my car and some other personal valuable effects.
I currently hold a term life insurance policy of $600,000 and should look at increasing the coverage to $700,000 to cover the anticipated shortfall.