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Old 12-12-05, 09:28 AM   #1
The_Guru
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How do you calculate required life insurance?

Hi

Since having our first child, I want to increase my life insurance ...
But in thinking about it, I don't really know how exactly to calculate what I need..

Any hints/tips/formulas ?
It's all well and good deciding to get bajillions worth of cover, but one has to pony up for the premiums for it too, so there has to be a limit somewhere..
How does one calculate the best risk/return value ?

G
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Old 12-12-05, 10:31 AM   #2
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There seems to be a common agreement among the financial experts that write books and do radio talk shows that 5 times your annual gross income is the minimum.

SS
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Old 12-12-05, 11:09 AM   #3
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Get a quote from a life insurance salesman and divide by 1000 .
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Old 12-12-05, 11:40 AM   #4
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Speaking as one who has been in the industry You need to seriously look at your estate objectives. Do you just want a short term income replacement? Do you want to provede the funding for your childs future education costs, etc. Also, how is your income?

What ever you do, do NOT but any 'bundled' life insurance product. I can not emphasise it enough "BUY RENEWABLE TERM INSURANCE!!!" Buy it in five or ten year blocks. This will give you the option to buy the maximum amount of insurance you can aford while you are young at a lower rate. When you need the coverage

Trust me most insurance agents will try to sell you between $250-$500K of some type of whole life or anuity product that holds a "cash value" benefit when you retire. These products are obscenly expensive. Most of your preimum is applied as commission for the salesman, some to fund the the cash bearing vehicle and a miniscule amount to support the insurance funding.

Perhaps you've heard the phrase: "Buy term and invest the difference"? That's what they are doing for you, only THEY control the investment vehicle AND yuour paying the salesperson to boot.

If you're curious, get them to quote you on a 1 million dollar cash value policy, then ask for the same benifit quoted on a term policy. I'll wager you get all kinds of song and dance from the salesdog as to the evils of a term policy and chances are very good that you'll never get a quote.

If you'd like to discuss the logic and rationale behind this estate building strategy, I'd be glad to continue via PM.

Also, I am not endorsing any one company over another. Just recommending a strategy.
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Old 12-12-05, 11:41 AM   #5
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Quote:
Originally Posted by The_Guru
Hi

Since having our first child, I want to increase my life insurance ...
But in thinking about it, I don't really know how exactly to calculate what I need..

Any hints/tips/formulas ?
It's all well and good deciding to get bajillions worth of cover, but one has to pony up for the premiums for it too, so there has to be a limit somewhere..
How does one calculate the best risk/return value ?

G

Tough question to answer as a lot depends on how the laws in Switzerland compare to US laws. Here, one goal is often to ensure that the surviving spouse & children have a place to live, so the insurance policy is priced to at least finish paying off the house.

At some point though, you have to determine if you're better off spending the money on traditional investments or on life insurance? Do you lose the policy if you stop making payments? How does the rate change as you age? etc.
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Old 12-12-05, 11:56 AM   #6
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Not an insurance person myself, and with no family to insure at the moment, so you've been warned. But my take:

Life insurance is a safety net for your family, not a lottery ticket. Are you the primary breadwinner? Or does your spouse make a comparable amount? If you're the primary breadwinner, enough to cover necessary one time big ticket expenses (mortgage if you have one, potentially child's education, etc.) plus 10x the amount your family would need (not want) per year to live comfortably is probably a reasonable starting point. If your spouse earns money, then the amount your family needs per year can be reduced by your spouse's salary. As you age, your needs hopefully will drop since your mortgage balance will be smaller and since you won't need to support your child for as many years.

Update: I see Stacey has an excellent response to your question. Take her up on any offers of assistance.
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Old 12-12-05, 12:10 PM   #7
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Quote:
Originally Posted by soonerschwinn
There seems to be a common agreement among the financial experts that write books and do radio talk shows that 5 times your annual gross income is the minimum.

SS
Actually Dave Ramsey recommends 10 X your annual income in guaranteed term life insurance. This is insurance that does NOT increase in premium throughout the term. Make sure you get TERM not whole life or any of that junk.

Ten times my annual income was more than i could afford but i got as close as i could. He also recommends disability insurance since like half of mortages are foreclosed on because of disability. It is very expensive however, and i havent done it. (yet)
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Old 12-12-05, 01:13 PM   #8
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First, buy term insurance to cover the period of your need. Buy 8 to 10 times your annual income. Your strategy should be to provide for your family as if you were still alive and working. The proceeds of the insurance payout would need to be invested to provide your survivors with income. You'll need to take into consideration insurance payouts from an employer, suvivor benefits from company pension plans and social security. Don't forget insurance for your partner. Even if they aren't working they provide 'services' that you may need to pay others to do - child care, cleaning, cooking etc. Don't buy life insurance on children. As cold as it sounds, kids don't contribute to family finances, so don't waste the money insuring them. Finally, buy disability insurance. You're far more likely to become disabled at some point than you are to die prematurely.
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Old 12-12-05, 01:52 PM   #9
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Quote:
Originally Posted by jschen
Not an insurance person myself, and with no family to insure at the moment, so you've been warned. But my take:

Life insurance is a safety net for your family, not a lottery ticket. Are you the primary breadwinner? Or does your spouse make a comparable amount? If you're the primary breadwinner, enough to cover necessary one time big ticket expenses (mortgage if you have one, potentially child's education, etc.) plus 10x the amount your family would need (not want) per year to live comfortably is probably a reasonable starting point. If your spouse earns money, then the amount your family needs per year can be reduced by your spouse's salary. As you age, your needs hopefully will drop since your mortgage balance will be smaller and since you won't need to support your child for as many years.

Update: I see Stacey has an excellent response to your question. Take her up on any offers of assistance.

You should also think about insurance for your wife even if she is a stay at home. Look at what it would cost you to buy the services she provides in the house. This dose depend some on the kind of job you have.
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Old 12-12-05, 02:20 PM   #10
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Figure out when you plan to stop working. Then figure out how long you plan to stay alive after that. Assume an interest rate, assume you want x-amount for a decent life style, subtract that each year that you plan to be alive and back track from your death to figure out how much money you need saved up to quit working forever.
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