How Much is Your Life Worth?
Determining the value of your life can be an existential question worth exploring. For life insurance experts, however, determining a life’s value is as simple as figuring out how much money your loved ones will need after you die.
Protecting income with a life insurance policy can help pay for a home, send your children to college, and pay for other child-rearing costs, among other expenses.
Adding up your potential lifetime earnings and figuring out how much life insurance you need is easy with an online calculator such as the “Human Life Value Calculator” at the nonprofit Life Happens. It asks for amounts for your annual income, years to retirement, tax percentage rate, how many years until retirement, and any savings or other assets you have.
It then comes up with an approximate value of your life, which equates to how much life insurance you need.
But there are other methods to determine how much your life is worth, and thus how much insurance you need. Here are a few:
Quick and easy: Multiply your annual salary by how many years you have until retirement. Add liabilities such as a home, car payment, tuition and other college costs, and you’ve got a good number to start with, says John Wenzel, co-founder of Archvest Wealth Advisors in Walnut Creek, Calif.
A $1 million life insurance policy is the norm for breadwinners, Wenzel says. For a spouse who doesn’t earn a wage at home, $500,000 is normal, he says.
A 20- to 30-year term policy makes sense for many people, he says, and covers their working years.
Focus on goals: The question of how much your life is worth should start with focusing on your loved ones and how your future earnings matter to them.
“With this approach, you begin to understand that it’s less about projecting your earnings and more about accomplishing goals, whether you’re here or not,” says P.J. Wallin, a certified financial planner at Atlas Financial in Richmond, Virginia.
“Often this will lead folks down the path of wanting to fund college for kids and making sure they’re taking care of through a certain age,” Wallin says. “Also they’ll want to make sure their significant other or other loved ones in their lives are taken care of for a certain time period, short or long.”
Cost of running a household: As any homeowner knows, the cost of keeping a house running includes much more than the monthly mortgage payment. There’s insurance, repairs, new furniture and appliances, remodeling, property taxes, and the list goes on and on. Add children, and the costs rise, along with the hidden costs of taking care of the kids and home that both spouses can contribute to with their time and energy.
A rule of thumb for young families or parents with children in college is to have life insurance equal to 10 times the income of a working spouse, says Andrew Novick, a certified financial planner at The Investment Connection in Center Valley, Penn.
“Once you get married, each spouse is counting on the other for help running the household,” Novick says. ” It takes more than money to run a household so I recommend the non-working spouse secure some coverage too, especially if there are minor children in the house. As an example, if the stay-at-home parent dies, life insurance can help to offset the cost of additional child day care expenses.”
70-90 percent of income: Not all of a breadwinner’s income necessarily goes to expenses their family has if they’re not around. For married people with dependents, the percentage of income that goes to support others partially or fully ranges from 70-90 percent, says Daniel Wrenne, a certified financial planner at Wrenne Financial Planning in Lexington, KY.
Once these “selfless expenses” are determined and the income replacement value is set, Wrenne looks at the assets and liabilities and how they would affect keeping the replacement income for as long as needed.
What’s key to remembering when determining how much your life is worth is having enough insurance to cover the expenses that you want paid after you die. You don’t want your family’s last memory of you to be a financial burden.
“How do you want to be remembered?” asks Wenzel, the financial advisor in California.
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