How Much Life Insurance?
How Much Life Insurance?
Register for tomorrow’s webinar here!
Full Transcript:
Today, I’m going to sell you life insurance. Wait, don’t stop the video. I’m just kidding. I don’t sell any insurance products, but I am going to help you calculate how much life insurance, if any, you’ll need.
Life insurance is best suited to solve one of two problems. Problem number one, you have a net worth in excess of $11 million, and you’re worried about estate taxes. I’m going to assume that most of you watching aren’t there yet, so let’s keep going.
Problem number two, there is somebody in your life that is financially dependent on your income, and you want to make sure they’re taken care of, should something happen to you. This is most common with immediate family members, especially if you have children under the age of 18. Let’s dive into the situation and see how much life insurance you’d need.
First, you want to start with your household annual expenses. If you’re not sure what your annual expenses are, you can just start with your take-home pay. Now multiply your annual expenses by 25 to get a lump sum. We’re using 25 because we’re back calculating a 4% withdrawal.
Next, you’re going to want to subtract your investment portfolio from that lump sum. Your investment portfolio is things like your taxable brokerage account, your bank accounts, and your retirement accounts, like your 401(k). Note we’re not using your full net worth here with things like your house because your family would still need somewhere to stay. Now, if your investment portfolio is greater than 25 times your expenses, congratulations, you’re already self-insured. At this point, you likely do not need life insurance. Now, if that’s not the case, let’s keep going.
You’re also going to want to subtract your current life insurance. So, with Shell, you get two times your annual salary as a company benefit. Now, when you sum all this up, you will get your additional life insurance need. Let’s walk through a quick example.
Let’s assume that you have household expenses of $80,000 a year, and we multiply that by 25. You get a lump sum of $2 million. Now, let’s assume you’ve also done a good job investing, and you have an investment portfolio of $500,000. And lastly, let’s assume that you have a base pay of $150,000 a year. So two times your salary for your current life insurance benefit is $300,000. Now, when we sum all that up, you see that you have a remaining need of $1.2 million. Now, this $1.2 million is just a starting point. Other things like a working spouse and other financial situations will cause this number to go up or down.
For those of you that work at Shell, I’m hosting a webinar tomorrow on Shell’s benefits, including life insurance. Register in the link below, and I’ll see you there.
