Insure the Goose before the eggs

When we begin to build a financial plan for our clients we discuss sources of income and assets to determine what needs to be insured against loss. Naturally we discuss homes and automobiles, but the one source of insurance we are most interested in reviewing is income replacement, or disability and life insurance.  Both available in the market place today come in many forms. The type is not as important as is the amount of income it will replace.

Consider that a person who is paid $40,000 per year will earn $1,600,000 over 40 years at work without factoring in a cost of living adjustment! The real financial risk to most families today is that the primary source(s) of income is lost due to loss of work. When that income is lost due to death or disability there are ways to insure those losses through insurance plans. If the income is lost then both short and long term objectives may not be reached.

How much to insure

There are many different calculations and formulas used to help clients address this question. We suggest that a family adequately protect the income by insuring enough to achieve their goals while still meeting current income needs. Since income is earned over time a present value for that future income stream can be calculated. Additionally, insurance benefits are paid to help offset a loss so the benefits are typically not income taxed. This means that an "after tax" income figure may be used in most calculations. Ultimately it is up to each family or person to decide what they are comfortable with, can afford, or qualify for. At the very maximum whatever you can qualify for and afford without sacrificing income that could be directed to other goals.
Monthly Income Needed:
Years Income Needed:
Annual Rate of Return: