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Buy the Right Amount of Insurance

Mark and Becky are forty-five years old and have 7 year-old twins, Bertha and Beatrice. They want to make sure they have enough life insurance to maintain their survivors’ living standards should either of them die prematurely.

ESPlanner can help; in the process of determining the couple’s highest sustainable living standard, ESPlanner calculates how much term life insurance is needed each year on each household head’s and spouse’s/partner’s life to ensure the same living standard for survivors, including children through age 19. If survivors will enjoy a higher living standard without receiving any life insurance, the program recommends zero life insurance be purchased for the potential decedent.

The program features contingent planning, which allows users to specify, in case they die, whether their survivors will have different earnings, choose to downsize their homes, hire au pairs or incur other special expenditures, etc. Finally, the program’s survivor reports let you “kill off” your spouse/partner and check that, were your spouse/partner to purchase the recommended life insurance, your living standard as a survivor will be as high or higher were he/she to meet an untimely death at the date you specify.

Becky is the major breadwinner. She earns $290,000 per year; Mark makes $200,000 annually. Both plan to work through age 65 and expect to earn the same amount adjusted for inflation. The couple has 25 years left on a $350K mortgage, $500K in 401(k)s, to which they contribute $10K per year, and $50K in regular assets. Given their past and projected earnings, their combined Social Security benefits, starting at 65, will total $49,662 measured in today’s dollars.

As indicated in the top graphic, ESPlanner recommends Becky hold $1,015,476 in life insurance in the first year, with her recommended holdings declining to zero over the next eleven years. Mark’s recommended life insurance is $265,287; the reason for the difference is simple—Becky provides more household income than Mark and thus it will take more to replace her lost income than it will Mark’s income. The survivor reports for Mark and Becky (see the lower graphics) show that, as survivors, Mark and the girls will enjoy the same living standard that Becky and the girls will enjoy were the untimely deaths to occur this year.

These recommendations assume no special/contingent needs. But what if Becky needs to hire an au pair for ten years at $25K per year were Mark to die? In this case, ESPlanner recommends $435,172 in life insurance holdings on Mark.