When you’re committed to buying life insurance, you may wonder how much life insurance you actually need to have. Like, is there such a thing as too much life insurance? Is there a certain way to determine your personal “sweet spot”? And if you’re using a whole life insurance strategy for your emergency/opportunity fund, or legacy, are you getting all that you’re entitled to?
While life insurance may not be a “need” in the same way food, water, and shelter are needs, many people WANT life insurance. It’s a useful way to create liquid savings without risk, for example. It also helps people feel more at peace knowing that their loved ones will have some financial means to carry on with life if they pass on. Others may desire life insurance because it’s safe from creditors and the IRS, and is great for financial privacy. And of course, some people want everything wrapped up in one! Whole life insurance is a wonderful asset for that purpose.
If You Already Have Whole Life Insurance…
Then you have a head start on all of these benefits. The good thing about whole life insurance is that you can have as many policies as you want, up to your Human Life Value. This sum, which is typically a function of your income multiplied by your years to “retirement,” is how life insurance companies cap your insurance.
This makes it possible to build a portfolio of insurance policies. In other words, you can start with any policy that fits your personal economy, and build up from there. So if you can only save $500 a month, you can start there. Then, as your income grows, or you pay off other debts, you can add policies to the mix.
To build a more effective portfolio, it’s critical to identify how much you WANT, on top of how much you’re entitled to. For while you may be more interested in the cash value component of life insurance, you still get a death benefit. And this death benefit can provide money to your heirs, help to handle your estate when you pass, and even contribute to your favorite charities or causes.
There are Limits to Life Insurance
While Human Life Value calculations are our preferred method of calculating your insurance limits, there are some other ways that people may determine how much insurance they “need.” For example, some people choose to multiply their income by 10 and call it good. And while this is certainly a good starting point, it may not be comprehensive coverage.
For example, if you’re 30 and only multiply your income by 10, you’re only giving your family 10 years’ worth of income. While this may seem perfectly adequate, it doesn’t represent your complete earning years. Hopefully, you intend to work for as long as possible, or at least to the typical retirement age of 65. If you are, that’s 35 years of income your spouse or children would miss if you passed away. It may seem like a lot, however, it’s what you’re entitled to.
Similarly, some use a “needs analysis” to calculate their insurance death benefit. This only takes into consideration what your family would “need” to pay for in your absence—the house, college costs, debt repayment, and more. This may seem like a good idea, however, it’s often difficult to calculate with accuracy what your family might or might not “need.” And grief is a funny thing; your family may make decisions you can’t anticipate, and they likely won’t either. If you’re entitled to more, why not get more insurance? That way, you give your family as much freedom as possible to handle things how they feel necessary.
What About Business Owners or Non-Working Spouses?
If you have a business and you’d like life insurance, companies should have no issue insuring you at the full estimated value of the business. And if you have an income that is separate from that business, you can also get insurance up to your full Human Life Value. If you’re a real estate investor, you can include that income as well.
If you’re a non-working spouse or have a non-working spouse, they can also get insurance. Spouse insurability is often calculated as 50% of the working spouse’s income. This is because many non-working spouses are stay-at-home parents, or otherwise contribute to the household in meaningful ways. If the spouse were to pass, that might create a need for the surviving spouse to bring on childcare or home services.
The Top-Down, Bottom-Up Approach
When you’re shopping for insurance, the best way to start is by knowing exactly what you can get from the insurance company. Identifying your upper limit gives you the freedom to get as much as you can if you want it. Often, we recommend it. Because you wouldn’t rebuild your home for less than it’s worth if you could rebuild it for the full value.
However, you may find that while you WANT to purchase your full Human Life Value, actually paying the premiums is a bit more difficult. That’s okay! That’s why you identify the “top-down” first, so you can then work from the bottom up.
Working from the bottom up means looking at your personal economy and identifying what you can contribute. How much money can you save each month? How much money do you want to save each month? What can you afford, and is there a way to reorganize some things to make your savings more efficient? These questions can all help you create a starting point. Knowing what you CAN get helps you choose what you WILL get.
And the great thing is, it’s often accessible for many families to buy a whole life insurance policy of a good size, and then buy term insurance that brings you to your full Human Life Value.
What Are You Entitled To?
If you’re interested in working with a Prosperity Economics Advisor to find out what your Human Life Value is, you can contact us today. We will connect you with an advisor in our network, so you can feel confident in your savings strategy.
