Why would ANYONE want to take part of their income that they work so hard for and spend it on a product that will provide no benefit until after they die…..and that they will never see the benefit of? There are so many better things to spend money on, right? Cars, boats, trips, jewelry… all kinds of “things”! There’s only one answer: Love.
We meet families all the time who want to take care of their loved ones after they die but don’t know where to begin. Often, there is an initial hesitancy to meet with an advisor. After all, it’s uncomfortable to contemplate our own mortality and nobody wants “to be sold” something…especially something they will never see the reward of! At The Braun Agency, we take a different path in helping our clients create a financial plan for their loved ones. Our approach is to help our clients calculate how much life insurance is needed to accomplish their own personal goals and then educate our clients on the different types of coverage available. We never “sell” our clients on a plan. We have a conversation to learn what you need and help you make an educated decision.
If you ask ten financial advisors how much life insurance you need, you’ll most likely receive ten different answers. Some advisors use guidelines. At The Braun Agency, we work with you to calculate capital needs based on the unique goals and circumstances of each family. We believe it’s the most accurate calculation that can help you plan for your family’s specific needs. Our financial team at The Braun Agency can assist you in making the calculations and is always happy to assist with any questions that you may have. However, you can also make these calculations yourself to get a better grasp of the amount of coverage that is right for your family. There is no “one size fits all” approach to planning for your family. This is your plan, so be sure that the amount of coverage you obtain addresses the things that you want for your family.
FIRST: Do you want your funeral paid for? If so, plan for $7,000-$10,000 worth of expenses depending on the specifics of the ceremony that you and your family prefer. Add more to the tab if you want your family to have a bigger “celebration of life”.
SECOND: Do you want the mortgage paid off? If you have a mortgage and you’d like to have your family remain in the home without the burden of a mortgage, record the mortgage balance here. If you are renting but you’d like your family to have a mortgage-free home after your death, record the amount of home purchase that you’d like your family to be able to afford. Don’t go overboard. Remember, even a mortgage-free house has expenses that are tied to the size and value of the home including taxes, insurance, maintenance and utilities.
THIRD: What other debts would you like to have paid off? Add up the balances of car loans, furniture loans, credit cards, student loans, and any other balances that you would like to have paid in full.
FOURTH: If you have children, do you want their education expenses paid for? Some families prefer to fund their kids’ college tuition, room and board at a state school for four years. Some families choose to fund just tuition. Some wish to fund partial costs and other families have a goal of paying for a private University and/or grad school. Other families leave it up to their kids to pay for higher education if that’s a path that their child chooses. This is your plan for your family and so the college fund should reflect that. Whatever your goal is, obtain the current cost per year and multiply by the number of years you wish to fund and multiply by the number of children.
FIFTH: How much annual income will your dependents need to maintain their lifestyle after the above items are taken care of? This is the most complicated number to come up with. A general recommendation is to start with 70% of total household income, subtract the annual mortgage payment, and then subtract the survivor’s salary that they would earn. To calculate the amount of life insurance you need to fund that annual income, multiply by the number of years your family will need the income. If you wish for your family to have the income indefinitely, then divide by an interest rate/investment return that you believe that they can conservatively earn without risking principal (Suggestion: 4,5, or 6%).
|Less paid off Mortgage||Less survivor|
|q Need Annual Income|
For # of Years
|Annual target Income|
|X Number of years to provide income||= Amount of life insurance for loss if income category|
|q Need Annual Income|
|Annual target Income|
|/ Conservative percent return (4,5, or 6% recommended)||= Amount of life insurance for loss if income category|
SIXTH: Is there anything else you’d like to have taken care of? Do you want to leave money to a parent, sibling, church, charity, school, or anyone else? Do you have an estate tax problem that needs to be resolved and prevents your estate from being sold at a fair sale price? If there is anything else you would like take care of, this is the place to put it.
SEVEN: Add it up. This is the amount of life insurance and/or liquid assets that you need so that your family may maintain their lifestyle according to your own wishes/plan.
- TOTAL of 1-6 __________________________
EIGHT: Subtract life insurance and liquid assets that you already have in place. Do not count “accidental life” in your inventory. You may choose not to rely on any policies you have through work since you have zero control over whether or not this benefit will stay in place. You must decide if it’s a benefit you want to rely on, or not. However, do include the balance of any savings accounts, checking accounts, mutual funds, and any other accounts that are easily liquidated. Do not count the net value of real estate or closely held businesses that are not so easily liquidated.
- Subtract existing policies/liquid assets __________________________
NINE: The number that remains is your net life insurance need. This is the amount that you need in additional life insurance for your family to have the lifestyle that you chose. This may seem like a large number but the calculation will, or should be, a much smaller number than what you would earn over the remainder of your career. Once the life insurance amount is put into that context, you may wonder if it will be enough to accomplish your goals. Indeed, that is why we take the time to make the calculation in the first place.
- NET LIFE INSURANCE NEED __________________________
Congratulations, you have calculated how much you need to leave your family to ensure that their lifestyle is maintained according to your wishes. This is a big step and satisfying it may make the difference between your family living comfortably after you pass or struggling to make ends meet. The next step to making sure that your family is comfortable is learning about the different options and costs of each option that are available to you.
The next step is to formulate a budget to satisfy this objective and learn what your options are. We will cover those items in another post, or you may call us at 757-467-8726 to request a contact for assistance.
Wishing you and your family much financial success!
Richard Braun, CFP, LUTCF
Richard is the only Nationwide Agency owner in Hampton Roads who is a Certified Financial Planner and whose agency incorporates a holistic, systematic approach with our clients. Richard also volunteers as an instructor for Bank On Virginia Beach which provides free, basic financial education and coaching to residents of Hampton Roads.
The Braun Agency’s mission is to get you from where you are to where you want to be, by helping you build your plan, achieve your plan, and protect your plan from uncontrollable events. In the process, we are committed to delivering to you the best financial products and services in the industry in a manner that exceeds your expectations. The Braun Agency serves thousands of households and small businesses in Virginia Beach, Norfolk, Chesapeake, Hampton, Newport News, Portsmouth, Suffolk and surrounding areas. To see what we can do for you, contact us.
The Braun Agency’s mission is to help you get from where you are to where you want to be financially by planning, achieving your plan and protecting your plan from unexpected events. In the process, our goal is to deliver insurance services in a manner that exceeds your expectations. See what The Braun Agency can do for you today. Give us a call at 757-452-4563 to speak with one of the licensed, professional members of our team or request a contact here. The Braun Agency. We’re on YOUR side. 757-INSURANCE.