Do you have any idea how much life insurance you actually need? More than 40% of Americans don’t have life insurance at all, and over half of those who do have it are underinsured. Here’s a case study that might help you assess your own life insurance needs.
Bob Bobberson is a healthy 45-year-old man who doesn’t smoke. Bob makes $45,000 a year as a real estate agent. His lovely wife Bobbina is a stay-at-home mom to their three kids, Bobby (13), Robby (10), and Bobette (6). They purchased their $120,000 home five years ago, and currently owe $100,000 on it. They have two cars, owing a total of $11,000 on them, and have $15,000 in credit card debt. How much life insurance does Bob need? Here’s how a conversation with Bob’s insurance agent, Fred, might go:
Bob: “I got a $250,000 policy through my job, and I think that’s enough.”
Fred: “We can take a look at your numbers and figure that out. First, add all personal debt, such as credit cards and auto payments and write that down.”
Bob: “Why do I need to cover all of it?”
Bobbina: “Because I don’t want to keep paying for that pickup truck that you insisted on getting, and I probably couldn’t give that gas-guzzler away if I tried. And a lot of that credit card debt is left over from before we even got married!”
Bob writes down $26,000.
Fred: “Then, add income replacement for at least eight years.”
Bobbina: “Make it twelve. That’ll last until Bobette is grown so I can stay home with her like I have for the boys.”
Bob: “Let’s see . . . 45 times 12 . . . carry the one . . . that’s $540,000.”
Fred: “Now add in what’s left on your mortgage.”
Bob: “ALL of it?”
Fred: “Do you want to leave Bobbina with a house that may be foreclosed on, or do you want to leave her with a house that’s fully paid for?”
Bob writes down $100,000.
Fred: “And finally, factor in the cost of sending each of your kids to college.”
Bob: “Can I just pick my favorite?”
Bobbina: “No! And remember, Robby’s in the gifted program at school and might get to go to Harvard!”
Bob: “Yeah, but Bobby’s a jock. He’ll probably get a scholarship.”
Fred: “It’s possible he could get injured. It’s probably best to not count on a scholarship. You can probably count on about $75,000 for four years in a public college per kid.”
Bob writes down $225,000.
Fred: “That adds up to . . . let’s see . . . $801,000. I know I can’t afford THAT!”
Bobbina: “Well you can’t afford to leave us in the poor house either!”
Bob: “Do you have any idea what it would cost to get that much coverage? I already pay $250 a month for what I’ve got!”
Fred: “Hold on just a moment and let me get you a quote for the premium . . . 45 . . . male . . . nonsmoker . . . it looks like I can get you $801,000 in coverage for . . . $291 a month.”
Bob: “Really? That’s close to what I’m already paying for less than half that!”
Bobbina: “We’ll take it!”
As you can see, Bob was severely underinsured and didn’t even know it. And he didn’t think that he could afford what he really needed. And here’s the interesting part: as Bob gets older, the amount of insurance he needs will decrease. His mortgage principle and credit card debts will go down as he continues to make regular payments. His kids will get older, graduate from college, and leave the house. Eventually the only coverage he will need will be for his final expenses and income replacement for his wife. This is called the Theory of Decreasing Responsiblity.
Try running the numbers for yourself:
- Add all credit, installment, and personal debt
- Multiply your annual income by at least eight
- Add the payoff balances of your first and second mortgages
- Multiply the number of children you are responsible for by $75,000 for a public college education.
Add those numbers together to get the total death protection you need. If, like Bob, you discover that you’re underinsured, or if you’re completely uninsured, please contact us today for a custom quote.