Case Study (5):
Personal Credit Report Review
Look at the Personal Financial Plan sheet #33. Use this and the suggested web sites of:
to calculate your life insurance needs. Go online and shop for term insurance for both you and your spouse. What are the results? Given your personal life situation, what would be a good decision for you?
Life insurance was a must several years ago when I started traveling with my job. My agent quickly ran me through an analysis and made a recommendation according the the off the cuff answers I could provide him while sitting in my car at the local grocery store. Things have changed since I got my policy, a different house more debt (college, mostly) and higher expectations and salary. Sitting down to review the needs was the first step. Guessing what my family may need after I die is pretty complex at first glance, but can be simplified and quite accurate. “Many experts say the best way to calculate the amount of life insurance you need is through a needs analysis, which can be broken down into a simple formula: Short-term needs + long-term needs - resources = how much life insurance you need” (insure.com, 2005). I have a term life policy but my wife does not. This experience has caused me to place a higher priority on getting one for her.
Using Kiplinger.com (2008) calculator I found the need for life insurance if my wife or I died. Short term needs included eliminating my college loans, car payments, (the evil) credit cards and an emergency fund. Long term needs were the living expenses, eliminating the mortgages and creating a savings account for my family's college needs as well as child care expenses. The first time through I was pretty generous and ended up finding that I and my wife needed about $5 million each. After running some numbers and realizing almost half of the living expenses had already been eliminated, the numbers dropped by 1/2 to 1/3. This is still considerably higher than had anticipated, but it was based on the assumption that income would not increase over time. The other assumption made was that the insurance needed to take the family through the next 60 years.
My policy included four additional years of schooling for my wife to finish her masters. It showed that she would not make any money for those years and need child care for the next 10 years. Her final income was also about 40% lower than my predicted income because of her field of interest. Education has significantly lower income than engineering careers. Other than these small changes the needs for my wifes policy were identical.
Insure.com (2008) gave quotes for a $2.5 million and $1.75 million policy for 20 years at $85.32 and $53.38 each month for a total of $138.70 each month. That is assuming that my wife and I are at peak physical condition and have no other history related issues (my wife is much healthier than I, she actually exercises). The values of the policy still seem to be high, but making some comparisons and discussing the assumptions with a knowledgeable person is the next step.
At this time my family will take the next steps in purchasing a life policy for my wife. Then we will evaluate adding extra insurance to get us to a comfortable level. Term life definitely seems like the way to go for a young family (smartmoney.com, 2008). My current policy is ten year term and if it were not for this class I may not have looked at it again until the policy was a bout to expire. Making a life insurance policy review a part of our yearly financial planning will ensure that it is updated when life situations change.
Resources:
Insure.com (2005). How much life insurance do you need? Retrieved August 8, 2008 from: http://www.insure.com/articles/lifeinsurance/coverage.html
Smartmoney.com (2008). Term or whole life? Retrieved August 8, 2008 from: http://www.smartmoney.com/insurance/life/index.cfm?story=lifeterm
Kapoor, Dlabay, Hughes (2008). Focus on personal finance: an active approach to help develop successful financial skills, 2nded. McGraw Hill Irwin, New York.
Kiplinger.com (2008). How much insurance do I need? (Calculator). Used August 8, 2008 at: http://partners.leadfusion.com/tools/kiplinger/lifeins01/tool.fcs
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