How Much Life Insurance Do I need?

Hey, what's up everyone and welcome to the School of Personal Finance. So in this video, I'm going to show you exactly how to calculate how much life insurance you need. And before I get into the calculation, I just want to go over exactly what type of insurance you should be buying and how it works. For 99.99% of you out there, you should only be purchasing term insurance. And the way that term insurance works, it's like pure insurance. There's no variables. There's no moving parts to it. All it does is provide you insurance. If you pass away, if you die during the term, then your beneficiaries get a big fat tax-free check left to them. So you get to decide what type of term you want to get and how much of a death benefit you want to get. And then depending on how healthy you are, if you're in good shape, if you're overweight, if you smoke, all these different variables come into play to decide how much that term policy will cost you. So a simple example is if you say, you know what, I need a million dollar term policy, and I'm 30 years old, and I want to protect my family for the next 30 years until I'm 60 years old. Then you go through underwriting, the insurance company, they're going to send somebody out to do, you know, your height, your weight, do a brief little physical, and they're going to come back and tell you how much the premium is going to be, how much it's going to cost you every month or every quarter or every year, however you decide to pay for you to get that million dollar term policy. And then if you die within those 30 years, no matter how it is that you die, most policies have an exclusion where if you commit suicide within the first two years, then it doesn't pay. But any other way that you pass away, it's going to leave your beneficiaries, the insurance company is going to write a check to them for one million bucks or whatever your death benefit is. And that's basically how term insurance works. So there's no savings component, there's no variables. 99% of the time, it's not going to pay anybody anything, you're going to pay for this insurance throughout the entire term of it. And hopefully, you're going to walk away when it's over and say, Oh, well, it didn't pay out to my beneficiaries. But at least I'm still alive and kicking. And that's it. It's just there to give you peace of mind to know that if the worst case scenario were to happen to you unexpectedly, that your family is financially taken care of. And that's it. All right, let's get to how to calculate how much term insurance you need to make sure that your family is protected. Alright, so let's calculate how much life insurance you need. So now there are a few different ways that like life insurance agents will calculate how much you might need. There's something called like the human life value, you could do the income multiplier capital needs analysis. These are all common ways. After doing it hundreds and hundreds of times with clients. This is my own little formula that I came up with very similar to the other ones. But it's just what I found came closest to actually getting to a true number of what people needed. So let's go through the steps. So the first one is to just multiply your income by 10. So if you make $100,000 a year, multiply that by 10, we're at a million bucks. Alright, so that's step one. Step two is to multiply the members of your family, not including yourself by 200,000. So if you have four kids and a wife or a husband, then that's going to be five individuals times 200,000. It's another million dollars. Okay, so now step three, we're going to add up all of your liabilities, all of the money that you owe. So your mortgage, your car payments, anything that you would want to be paid off, if you were to pass away unexpectedly. We're going to add all those up, and we're going to write it on that line for number three right there. Then number four, we're going to look at all the money you've saved and accumulated, including any existing life insurance policies that you have. So the amount in your 401k, the amount in your savings account, in IRAs, and also the death benefit of life insurance that you have if you were to pass away. We'll add all those up. We'll throw that right there on line number four. And then we just do the simple calculation. We add step one and step two. So in this example, they were each a million bucks. So we're at $2 million. The sum of all of your outstanding debts, let's say that that was another $500,000 between mortgage and car payments and student loans and all that. So now we're at $2.5 million. And then we would subtract out any savings or existing life insurance that you have. So let's say that you have $300,000 in a term policy, and you have 200 grand in retirement accounts. That would be $500,000. So if we subtract that out, that would bring us down to $2 million. So that is how much life insurance you would need at this point, $2 million. And then really the next step is just figuring out how long of a term should you get. So now a good strategy when structuring your term life insurance is to ladder the policies. So let's say you're 30 years old and you do need $2 million worth of life insurance to protect your family. But you're thinking to yourself, in 20 years, pretty much all of my kids are going to hopefully be out and on their own. I'm going to have a lot more money saved in my retirement accounts. Hopefully I won't have any debt. Maybe my mortgage will be half of what it is today. I really don't need all that much after I reach that age of 50. So what you could do is you could get a 20 year term for a million and a half dollars and then go ahead and back it up with a 30 year term for $500,000. So at the end of 20 years, when you turn 50 years old, that million and a half dollar term policy falls off and you no longer have that protection and you're no longer paying for it. And then what you're left with from ages 50 to 60 is that $500,000 term policy. That's a good way to go where it might fit your individual needs a little bit better than just getting a 30 year term policy for $2 million because that is going to be much more expensive. And the reason is, there's a much higher probability that you're going to die in the next 30 years than you would die in the next 20 years. So the higher probability of you dying, the more expensive the insurance is going to be. But laddering the policies, it's a good way to kind of customize it and structure it to your individual situation. And I can't stress enough the importance of having enough life insurance in place in case something were to happen to you. I've seen it too many times where there's been an unexpected death and the family is left trying to figure out what to do. You see the GoFundMe page pop up on Facebook. It's just a very unfortunate situation. And there's just a simple way to alleviate that financial stress if that were to happen. And it's through term insurance. It's not that expensive. If you don't have it already, you really owe it to your family to go get it. Yes, the odds are it's never going to pay anybody anything. And that's okay. Hopefully your homeowner's insurance is not going to ever pay out or your car insurance is not ever going to pay out. But you need these insurances in place in case the worst were to happen. It's an act of love. So if you don't have it, go do it. Protect your family. It will help everybody sleep better at night. All right, everybody. That is it for calculating term insurance. I hope you found this helpful. Please make sure to hit that like button if you enjoyed this video. Hit that subscribe button if you have not subscribed to the channel yet. And I will see you again next week. Thanks a lot.