An intriguing and valuable question you probably don’t ask yourself every day is, how much is your life worth? It’s open enrollment time again and your chance to decide what type of coverage you want for next year, which is rapidly approaching (!), and how much you’re willing to pay for it. If you’re an entrepreneur with employees, hopefully you already have your benefits offerings in order by now. One of the questions you and your fellow employees should be asking during every open enrollment period is this question of how much is your life worth?
It probably seems strange to try and come up with a dollar figure on your life if you’ve never done it before. Who’s to say your life is worth more than your friend’s, colleague’s, neighbor’s? Well despite what the Constitution says, all men and women are not created equal! Some people’s lives are worth more than others’ based on their age, health, skill sets, assets, number of dependents, etc., especially from the point of view of our friendly life insurance companies.
What’s The Point Of Paying For Life Insurance?
Life insurance is quite a curious asset since you don’t get to have any of it if you die. This is why a lot of employees like yourself, especially those in the younger demographic, don’t really see the point in paying for life insurance. But you have to remember that life insurance is not for you, but for those who depend on you to maintain their quality of life.
Even if you don’t have any dependents right now, it’s still a worthwhile exercise to try and figure out how much is your life worth. And estimating your life’s worth is not as subjective as you might think. Life insurance companies employ hoards of actuaries to mathematically determine exactly how much their companies can make off of you until you do die.
Sounds a bit grim, but they are in business to make money after all. Now I don’t want to bore you to death with all the mathematical jargon so instead, let’s discuss the main things you need to do to insure you are appropriately covered without wasting too much money.
Calculate Your Monthly Expenses
If you have any dependents who do not work, or don’t make as much as you, it’s important to calculate your average monthly expenses over the last few years. Your objective is to determine a conservative amount of time your life insurance policy will buy them in order for your dependents to cut costs or improve income to match expenses.
Perhaps you want your insurance policy to take care of your family for the rest of their lives. That’s obviously going to cost a lot more than a policy that would only provide them with funds to cover expenses for 2-3 years. You have to consider what the likelihood is of them being able to support themselves independently if your income was suddenly gone. Does your spouse have sufficient education and job skills to earn a comfortable salary? How many years do your kids have left in school before they can enter the job force?
Looking at your month to month expenses is an important place to start so you can get as good of an idea as possible for what you are currently spending money on – housing, utilities, education, healthcare, meals, travel, shopping, loans, maintenance, etc. Being aware of personal finance and having a basic budget is therefore an imperative tool.
Calculate Your Yearly Expenses
After you’ve calculated your monthly expenses down to as much detail as possible, round up to the nearest $1,000 and multiply by 12 to find out your conservative annual expenses.
Most people look at income and expenses in annual increments, so it is easier for you to compare an annual expense figure when you decide to choose how much life insurance to get. Figuring out how much coverage to get is also a lot less complicated when you think about it in yearly increments versus monthly.
How To Decide How Much Insurance To Get
The amount of life insurance you should get is very subjective. It really comes down to what your comfort level is. Five years worth of living expenses is generally the minimum amount of life insurance I would advise getting. I personally shoot for 10 years.
Let’s say a typical $70,000 a year household spends $40,000 a year in annual expenses after tax. A $200,000 life insurance policy is generally the minimum the head of household should have. If the family insured has young children in elementary school, it’s probably best to take out a term life insurance policy for 20 years, which will allow their kids to graduate from college and become independent. And don’t forget to add in those higher education costs into your annual expense estimates.
Everything comes with a cost though. The greater your life insurance coverage, the higher the monthly premiums are going to be. But this is your family’s well being we’re talking about though. So don’t be a penny wise and a pound foolish.
Deciding Between Term and Whole Life Insurance
Because Americans can’t seem to save or invest as much as they should, many life insurance agents will try and sell you whole life insurance policies, which employ an investment component. As a result, your premiums are much higher than term life insurance, which is essentially like a lease – you pay a premium for a set duration and a set amount, and after the duration is over, there aren’t any more payments.
There are 25+ page research reports out there you can choose to read, which go into detailed pros and cons of both. But my straightforward and uncomplicated recommendation to you is to keep it simple and focus on the primary purpose of life insurance in the first place, and that is to provide money in case of death. Hence, for the large majority of you, just get a term life insurance policy and focus on investments through other vehicles.
How Much Is Your Life Worth?
It’s quite intruiging to try and figure out how much is your life worth because it’s not something we do very often. You might feel like a million bucks, but rest assured, you’re probably worth much less especially if you don’t have dependents.
Utilize this open enrollment period to protect yoursef and your family with life insurance and other benefits like flex spending, dental, vision, and health insurance for next year. Don’t wait until the holidays are in full swing and the deadlines are past! It really doesn’t take that long to estimate what your life is worth if you utilize your current budget. Plus it’s also a good time to start setting financial goals for the next twelve months as well.
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Updated for 2017 and beyond.
Daisy @ Prairie Eco Thrifter says
We have life insurance through my work. We get a really good deal on it – it seriously only costs us $10/month to insure my fiance’s no smoking, no drugs, young self. We get about $350,000 coverage which is probably a bit over insured, but he is at the time a higher earner than me and I’m insured for about the same.
Tushar @ Everything Finance says
There’s an interesting and fine line between being under and over insured. Of course if one person is a stay at home parent in the family, or if one person makes a lot less than the other, you should be insured more. We are insured for about $500K each. That way if one of us dies, the mortgage can be paid off, and the other person can live comfortably.
Yeah you’re right, nobody wants to be under or over insured. That’s great you have life insurance and know that your mortgage could be completely taken care of if something were to happen.
Financial Samurai says
Great question, and a very pertinent one when calculating life insurance! I’ve got term life insurance as well as an umbrella policy given I’m a landlord. I used to think insurance was a waste of money. But given the need to protect assets that took so long to accumulate, I feel like I’m getting my money’s worth.
Nice! I think age has a lot to do with how we perceive life insurance. I remember when I first started my job I just shrugged when I found out my employer gives us life insurance benefits. Now I think it’s totally awesome!
Bryce @ Save and Conquer says
We took out 25-year term life policies for $500k in benefits for both my wife and myself shortly after our son was born. Mine costs $100/month and my wife’s policy is $50/month. Mine was more expensive due to my age and cholesterol level. Our son is 12, so we are halfway through our policies. Hopefully, our son will be self-sufficient by the time he’s 25. We plan to retire in only 9 years, so we won’t need the other’s earnings after our term life policies run out.
Excellent job taking out term life policies when you had your son. Nine years until retirement sounds like a great target!
It’s funny I was just groaning over the fact that I have to complete open enrollment! Hope for the best, but prepare for the worst – that’s pretty much what insurance is!
But striking a balance between coverage, deductible and premium is always tricky!
I hear ya – open enrollment can be a drag but at least we only have to do it once a year! 🙂 yeah getting a good balance between all of those things isn’t always straight forward. I’m definitely getting more conservative with coverage as I age.