Income Replacement
Providing for a Family
Replacement of income is one of the primary reasons to purchase insurance. Over a lifetime a family's total income can really add up and go a long way to protecting the family's future financial stability. For example, a 40-year old who earns $50,000 per year will earn $1.25 million if he works to age of 65. Add a modest 2.5% annual inflation factor and assume raises to keep pace with inflation, his future earnings are closer to $1.7 million.
How Much Life Insurance?
But just how much life insurance is needed to replace future income for a married couple? One of the most sophisticated formulas for determining the economic loss associated with a person’s death may come from the United States Department of Justice. Its formula for distributing the Victim’s Relief Fund to surviving family members of those lost on September 11 generates some eye-opening numbers. For example, they calculated the economic loss of a 30-year-old married individual with two dependent children ages newborn and 9 years who was making $50,000 a year to be $1,919,542.
That number goes beyond the two or three times income that many employers offer as a group life insurance benefit. It even goes beyond the five to 10 times income that many industry experts recommend.
Answer Key Questions
So where to start? The key to providing loved ones with an adequate safety net is asking and answering some key questions:
Debts – What is the amount of your mortgage? Student loans? Credit card debts?
Children – What will the cost of education be including college or post-graduate plans ?
Retirement & Lifestyle – What standard of living will the survivors maintain? What will the spouse's retirement lifestyle be like?
Other Considerations – Does the plan include other dependents such as elderly parents that are counting on assistance in the future?
Other Income Sources
Once these amounts are tallied, take into consideration other income, which may reduce or increase the amount of insurance needed. Some of these include:
Other life insurance
Income taxes that reduce the take-home pay
Savings
Other assets
Earning power of the survivors
Social security benefits for minor children
Duration of the income need.
How Can Ameritas Advisor Services Help?
For help calculating life insurance need, try our insurance needs calculator. For further assistance on calculating a specific insurance need, deciding on the right type of insurance, or evaluating current policies, call the Ameritas Advisor Services salaried professionals.
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