As an example, a 35 year married man with two young children (ages 7 and 13), earning $75,000 annually, has 20 years left on his mortgage (currently $250,000).  He and his wife expect both children to attend college.  Here’s how a laddering plan would work for this client:

• Purchase a 30 year term policy with a $2,250,000 death benefit (Income x 30 years).
• Purchase a 20 year term policy with a $250,000 death benefit to pay off the mortgage (as the mortgage amortizes as he pays it down, extra benefit can go toward supplementing college funds).
• Purchase a 15 year term policy with a death benefit of $150,000 for the younger child’s college expenses.
• Purchase a 10 year term policy with a death benefit of $150,000 for the older child’s college expenses.

Essentially, he would have a $2,800,000 death benefit for the first 10 years, then the benefit would drop as each shorter term policy expired (as the need for each policy was eliminated), leaving him with $2,250,000 of benefit for the final 10 years.

I have done this laddering for several clients over the years, using separate policies.  However Legal & General America, through their Banner and William Penn companies has developed riders you can add to a base policy, rather than doing it though separate policies.  In the above example, one would purchase a 30 year base policy of $2,250,000, then add the following riders:  $250,000 for 20 years, $150,000 for 15 years and $150,000 for 10 years.  As each rider expires, the cost of the rider would disappear as well.

While serving the same purpose as purchasing separate policies, this method could prove to be less costly, as there wouldn’t be separate policy fees that are built into each separate policy’s premiums.  I expect to see other companies following Legal & General’s lead and come up with their versions of these riders.

As our term life insurance quote engine isn’t capable of quoting with these riders, feel free to contact us at 866-691-0100 ext. 105 if you would like to get quotes with these riders.

Of all the questions we are asked, one of the top ones is how much life insurance should I have? Also, Do I have enough life insurance?

There are tools to calculate how much life insurance is right. You can look it up on the lifeinsure.com site or simply use the “Interest method.”

This works as follows: How much income would your family need to maintain life style, save for future needs and wants such as college and retirement for your spouse and build in a “fudge factor” for not having enough? Let’s say the answer to that question for you is $$80,000 per year.

The formula then is to

1. Pick an interest rate that you think your spouse or dependents could make. Let’s use 5% for an example.

2. Divide the income ($80,000 by 5% or .05) That comes to $1.6 million.

3. Thus you need $1.6 million of cash to provide $80,000 per year. You can subtract the amount of liquid cash or investments from the $1.6 million and you now have a life insurance amount to work with.

Here’s the formula: Income needed per year divided by interest rate = result minus cash and liquid investments.

See the page at the lifeinsure.com site How much life insurance should you have?

In the last post I talked about a simple method to figure out how much insurance you should have. You can also try a link that’s a little more scientific: Human Life Value Calculator.

Here’s an interesting analogy we’ll call the “money machine.” If you had a machine that made you $100,000 per year every year without fail, how much would you insure it for in case it broke down, got stolen etc.? Probably, all the insurance you could get…. but realistically you’d want to insure it for its replacement value just like you would with a house or any valuable.

So, how do you calculate the replacement value of that machine? Take a look at the prior post where we used an interest rate to work backwards to an amount of cash. In that example we took $100,000 of income and divided by 5% and came up with a value of $2,000,000. That would be a fair amount to insure the machine since you could invest $2,000,000 at 5% and have your $100,000.

Now turning to one’s life, financially, you’re the money machine! If you as that money machine broke or didn’t work you should have disability insurance and if you have people that depend on you financially you should have the proper amount of life insurance.

Well, you can also look at the economic value of your life. If you die the income stops and if others depend on that income then that should be replaced. The amount of money needed to replace the income that wouldn’t be made if one dies, is called one’s human life value.

You can follow this link and learn more about that concept but here’s a summary: Take your income and use an interest rate that one could earn today.

Let’s use 5% for this example. Let’s say your income is $100,000 per year. To replace $100,000 per year at a 5% return, you take the income and divide it by the interest rate. ($100,000 divided by 5% or (.05). The answer is $2,000,000.

To prove that out, multiply 5% X $2,000,000 and you’ll see that you get the $100,000. So, in very rough terms that’s how you figure out your human life value and it’s a goal to shoot for in coming up with the answer to “How much life insurance?”

To review: Put your annual income in a calculator and then divide by .05 (or the interest rate of your choice) and there you go, one’s human life value.