Brycast Financial Planning, LLC
    Registered Investment Advisor Firm
Insurance     

Insurance is one of those products that you probably don't want; unless you discover that you need it.

How do you determine if you need it or not? Since there are different types of insurance, we can examine each type individually.

 

Let's consider life insurance first. Generally, you'll hear the expression "premature death". This means someone died with major financial responsibilities; such as a mortgage, or raising children. Certainly, you don’t want to leave your family with an unpaid mortgage, especially if your spouse does not work and there are young children to raise. Let’s assume this is the case and you want to know how much insurance you need. In this example, we’ll look at the minimum needed. 

 
Here is a fictional family along with some relevant facts. 
 

Member

Salary

Age

H - John

$100,000

35

W - Mary

0

33

S – William

0

5

D - Ann

0

2

 One method of determining the minimum amount of life insurance needed is known as Human Life Value.  It’s pretty simple in terms of assumptions. 

1)      You die today

2)      You would have worked until you retired at 66.

3)      Social Security & Income taxes are excluded from insurance benefit.


The quick calculation is

Salary  =                         $100,000
Income Tax @ 20% =     -$20,000
Social Security Tax          -$7,650
Net Take Home =           $72,350  

 
Minimum required insurance = $72,350 times 31 (years to retirement) = $2,242,850

 

Hidden in the assumptions is that you are living within your means before your death. If you are currently living beyond your means (i.e. accumulating debt), your family may have a hard time making the money last. Also, if you are not saving for your children's college education, it's unlikely that the insurance benefit will pay for their college expenses. 

Click Here for Types of Life Insurance