Life insurance calculators. Meant to help you, but do they leave you more confused?
Have you ever looked at so many numbers and figures, not knowing what they mean, that your eyeballs roll up into your head?
You become even more confused than when you started, right?
That’s how we at My Family Life Insurance feel when we see life insurance calculators on other websites. Don’t misunderstand us; calculators are needed. And, we aren’t bashing the other websites. What better way to determine your life insurance needs than by plugging in a few different variables into a simple life insurance calculator? Well, there is a problem with the average life insurance calculator found on most websites. Read on to understand more and what we do instead.
The Problem With Most Life Insurance Calculators
We find two problems with the typical life insurance calculator:
- it is too complex – simplicity and sensibility rules for any calculator
- it really isn’t needed. If you know and understand your financial situation, you really don’t need a calculator. That is a big IF. Life insurance calculators are designed to aid in the need understanding
When we were studying for the CFP® exam, we had to learn a complex life insurance needs analysis that incorporated the ages of any children, social security blackout period (say what?), estimated inflation rate in the future (come on, really?), and estimated return on invested assets (seriously!), among other factors. (For real. We are not joking.)
While this needs analysis could illustrate an almost “accurate” portrayal of needs, there were still limitations.
For one, the result was still an estimation based on assumptions. If you could guess the return on your future assets with accuracy, then you need to quit your day job!
Also, and more importantly: who in their right mind want to go through an analysis like that? That’s right – not many. Not only would it take too long to input, it would take equally long, if not longer, time to explain.
When we passed our CFP® exam, we pushed this complex life insurance needs analysis aside. During our conversations with clients, if the topic of life insurance came up during our planning, we asked one question and one question only to get an idea of the need.
One Question Is To Know Your Life Insurance Need
Don’t need a fancy life insurance calculator. When it comes to determining your life insurance need, you only need to answer one question and one question only:
What do I want my money to do upon my death?
That is it.
No questions about blackout periods.
None about inflation.
None about your children’s ages or what your mother’s maiden name is (Ok, we made the last one up).
Your life insurance need should be explained on a piece of paper. Do you even need a calculator? Think about it. Maybe. Maybe not. Just answer the question. If you do need a calculator, it should be easy to understand. A life insurance calculator should simply aid you in answering the question: What do I want my money to do upon my death?
Our Really Easy (and Easy to Understand) Life Insurance Calculator
So that’s what we at My Family Life Insurance did. We created a really easy life insurance calculator. Feel free to download it here. The calculator is interactive, and once you have completed it, you can print it out or save it to your computer.
What Is On Our Really Easy Life Insurance Calculator?
Our life insurance calculator is broken into three sections. The sum of all three answers the question: what do I want my money to do upon my death? As we walk you through the calculator, the understanding will all make sense. We promise. It will be handy to print out the calculator sheet now as we walk you through. We included example values for ease of understanding. Don’t worry; you can easily overwrite these values with your specific situation.
In the first section, you will determine your total life insurance needs. This is the beginning part of answering, “what do I want my money to do upon my death?” Within this section are 7 additional components that need to be answered. We explain what they are and why.
Your gross earnings – we are 99% sure your surviving spouse and family rely on YOUR income. If you are gone, what will they do for money? Life insurance replaces your income so your surviving family has money to live. (FYI for stay-at-home parents: don’t short change yourself. Many prominent industry publications state stay-at-home parents make the equivalent of over $160,000 with all the work they do!)
Include a cost of living adjustment, but it is not the adjustment you know that moves with inflation. This adjustment answers the question: how many years do you want your gross earnings to last for your surviving family. The factor is essentially per year. We recommend no less than 5 (i.e. 5 years) and no more than 10, but the right number is dependent upon your situation.
Add any remaining home mortgage or rent to pay off, if you wish.
If you have kids, it would be prudent to include funding for college. Would you want your money to do that?
Likewise, your funeral needs to be paid. Do you want to leave that to your surviving spouse to figure out? Funerals, including cemetery services, can run beyond $10,000.
Did you cosign a loan? Have debt you owe with someone else? Upon your death, the loan servicer may require the other borrower to pay in full. Do you want that to happen? (Conversely, do you want that to happen to you if the other borrower dies? This situation can happen with student loans.)
Anything else we missed? Do you want to give money to charity upon your death? Do you own other assets in which your spouse (or someone else) will require to pay? Insert anything else you want to money to do upon your death.
The Question. Answered.
Look at the sheet you printed out. Remember, these are example numbers. However, it shows $450,000 of life insurance need, which will:
- provide 5 years of your income for your spouse at $50,000 per year
- pay off the mortgage of $100,000
- fund your son’s college education of $50,000
- provide $10,000 for your funeral
- pay off the $25,000 auto debt you cosigned with your brother,
- and provide $15,000 to the American Cancer Society
This is what you want your money to do upon your death. Another way we ask the question:
“If you were to die tomorrow, you want your money to do…”
Now, you have your answer.
Many people already have some life insurance or have some through their employer. In this example, the insured has a $100,000 policy through MetLife. Let’s assume it is employer coverage.
Most financial planners agree that relying on life insurance through one’s employer can be dangerous. Just look at our sheet. If our example applicant died without adequate life insurance, how long do you think the $100,000 MetLife policy would last? Not very long.
Which brings us to our final section. It is true. Upon an unexpected death, surviving family members have to sell the home or other assets if they don’t have money. Dreams are put on hold or not completed at all. Think we are joking? All you need to do is peruse the pages of any crowd funding site to see there are many people who wished they establish proper life insurance coverage.
In this section, you can include any assets you want your family to sell upon your death. Treat this section carefully. You don’t want to sell family heirlooms – but it does happen. We included $15,000 of jewelry to sell. Would you want to do that, especially if it is a family heirloom? Of course not! What can you sell? Maybe there is a vacation home that you don’t want the surviving family to support. You certainly do not need another car. There can be assets that are worth selling.
When all said and done, our example life insurance need is $335,000. No complex astronomical equations or questions. Easy and simple.
Upon filling this sheet out with your own specific situation, print it out and review it with your family. It is important they understand the needs and intentions so there are no surprises. You should sign it as well as your spouse or primary beneficiary. It is important that they (and you) understand that if the ultimate need is, for example, $500,000, but you apply for $200,000, that there is a significant cash gap they will have to somehow close.
We hope our easy life insurance calculator aids in the discussion and determination of proper life insurance coverage. We at My Family Life Insurance can help facilitate any needs discussions with you and your family. Feel free to contact us or use the form below should you have any questions. We are here first and foremost for you and your family.