A general rule to gauge the death benefit one needs may not be ideal for three client scenarios
When discussing life insurance coverage with clients, life insurance agents may refer to a rule of thumb that recommends a death benefit that’s between seven and 10 times one’s annual pre-tax income. But that figure may not be helpful, particularly in three specific cases.
“If you’re a stay-at-home parent, you’re not receiving financial compensation for hard work at home,” said Deborah Meyer, CEO of US-based firm WorthyNest, in a piece for Kiplinger. “Following the rule of thumb, you should have no life insurance coverage, because your financial earnings are zero.”
The death of a stay-at-home parent would likely mean increased costs of childcare and other professional home services like housekeeping, meal delivery or preparation, and home maintenance for the surviving spouse. Meyer said the total expected expenses from those services should be determined, taking into account the annual cost of each and the number of years they’ll be needed.
Families with young children would also probably need more than 10 times their annual salary, especially when the parents are still building work experience. “Think about future expenses and how long it will take you to amass enough wealth to accommodate your family’s needs,” Meyer said.
Citing her own family as an example, Meyer described the current and planned expenses she and her husband have worked out. Those include childcare costs for three young boys, a mortgage, private grade school tuition, tuition for Catholic high school, and daily living expenses like clothes, food, and activities for the boys. “College is incredibly expensive and must be considered as well,” she said. “My husband and I each have coverage closer to 20 times annual salary.”
Finally, she noted the challenge faced by those nearing retirement, particularly in term life insurance. Clients in their 50s and 60s face substantial increases in premiums, and those set to retire within a few years may have amassed enough wealth to live comfortably anyway.
“[In these cases,] self-insuring, or using existing assets in lieu of an outside insurance policy, may make sense,” Meyer said. “Whole life or variable life policies usually require significant premium payments in the early years of a policy with the hope that premiums can stop in later years and the policy remains active or ‘in force.’”
