by Richard Wesselt, Founder and Principal, Wesselt Capital Group
Life insurance is something a lot of people put on the back burner. Some procrastinate because of the time constraints and others put it off because they are concerned about the cost or the complexity of insurance policies. However, I want to emphasize the importance of life insurance as financial protection for you and your family.
In my last blog I discussed the advantages of whole life insurance, and why I think choosing this type of policy is an important part of building a sound financial plan.
Unfortunately, many people who do invest in life insurance end up with a plan that leaves them underinsured. How much life insurance do you need? One of the best ways to know is by calculating your “human life value.”
What is human life value?
Human life value refers to your total income potential over your lifetime. Calculating it involves estimating your expected earnings, as well as the value of the income to your family. Another important consideration is the potential growth of the your earnings.
Age comes into play here, because we need to estimate how long the beneficiary of the policy will need the death benefit. For a person in their 30s, human life value is calculated as roughly 30 times their annual income. It decreases as a person ages, so in your 40s it is 20 times your earnings, in your 50s, it’s 15 times your earnings, and in your 60s it’s 10 times earnings. For a person in their 70s it would be five times earnings.
As you can see, the younger a person is, the higher death benefit the beneficiary would need to make up for lost wages over that period of time.
Here’s an example
A person in their 30s earns $100,000 a year. Their human life value is 30 times their annual income, making it $3 million. If this person passes away, the surviving spouse would need a death benefit of $3 million. When planning, it is expected this death benefit would be kept in an interest-bearing account that would earn about 5 percent annually.
But the concept of human life value is much more than a math problem. If a person is properly insured, their family’s goals, dreams and desires can survive a loss.
Getting the right life insurance coverage
It is very rare that someone understands human life value and purchases the right amount of coverage. This is why making sure our clients understand the proper amount of protection is something we spend a fair amount of time on relatively early in their life.
While you may always be able to invest in other ways, such as a mutual fund or a 401K, life insurance cannot always be bought, perhaps because of underlying medical conditions or other life factors. This makes investing in life insurance early in your career an important first step in building a sound overall financial plan.
When you invest in whole life insurance, base the policy on your human life value, and also practice savings discipline, you are on the road to financial security for you and your family.