Consider More Than Just Wages in Determining a Woman’s Life Insurance Needs

Most women don’t understand the economic impact their death would have on their families. They think that buying enough life insurance to cover the loss of their earnings will keep their family from suffering financially. However, wages make up only one part of many women’s economic contributions to a family.

The most common method for calculating how much life insurance to buy is the “multiple of earnings” method. In this approach, you multiply your annual income by a number, usually between five and 10. While this method is simple, it has several drawbacks. Choosing the multiple is arbitrary. It doesn’t consider potential wage increases or the effects of inflation, nor does it measure a woman’s non-wage value, which is just as essential to her family’s economic well-being as her earnings from a job. Many women’s domestic and child-rearing services must be turned over to paid professionals in the event of death.

Women should use the Human Life Value method to get a more accurate idea of how much life insurance to buy. This method considers the present value of all future income a woman can expect to earn for her family’s benefit, plus other deals she hopes to contribute, fewer taxes, and personal consumption through her planned retirement date.

Follow this six-step method to calculate your Human Life Value:

1.   Decide on the length of time your life insurance needs to provide for your spouse. In most cases, this would be your spouse’s remaining lifespan. To determine this, deduct your spouse’s current age from his assumed life expectancy.

2.   Calculate the monthly household expenditure and the percentage you spend on yourself. Subtract the rate paid on your individual needs from the overall cost. After adjusting the figure you get for inflation, this will be your dependents’ future monthly household expenditure after your death.

3.   Account for the life stages of dependent children. Calculate the percentage of the monthly household expenditure on your children and how long they will depend on the family for support. Don’t forget to factor in other expenses, like education or weddings.

4.   Factor in the impact of inflation. You must factor in the effects of inflation on household spending because inflation results in more money spent buying the same objects/goods.

5.   Determine the present value of the future monthly household expenditure. To do this, you will need a discount factor multiplied by the monetary value to reduce the expected future sum to its present value. Generally, the rate of return on low-risk securities/deposits is used as the discount factor.

6.   Consider the present value of outstanding liabilities. Calculate the current value of due obligations such as your mortgage or car loan. This needs to be taken into account because it will aid in determining how much has to be set aside to help your dependents pay off these liabilities in your absence.

Sound too complex? Don’t worry; Brian Gruss can assist you with these calculations.

Using these calculations to determine the amount of life insurance to buy takes more time, but isn’t your family’s financial security worth it?