There was a recent story about how Kris Jenner, Kim Kardashian’s mom, wants her daughter’s baby daddy, Kanye West, to pick up a Ten Million life insurance policy naming the child as primary beneficiary and Kim as contingent beneficiary which raised some interesting issues that can be applied to non-celebrities of normal wealth. While no one knows whether the story is true nevertheless factually accurate, the issues raised in a simple reading of the article should be important to most people. Personally, I believe that obtaining life insurance is one of those “things” that is best to purchase/obtain with a professional rather than an online equivalent for two main reasons: amount of insurance and ownership/beneficiary. Today, I am just going to focus on amount of life insurance purchased tomorrow I’ll talk about ownership/beneficiary.
How Much Life Insurance Should One Purchase?
If we are to believe the story the first thought I had was Kanye is going to be woefully underinsured at $10,000,000 regardless of which method used to calculate need. Each of the methods, Human Life Value and Needs Based, have their pros and cons and use of either should be looked into with your insurance professional.
Human Life Value
One way to calculate how much life insurance one should buy is by calculating his or her human life value. Investopedia provides a pretty good definition of one’s Human Life Value,
A method of calculating the amount of life insurance a family will need based on the financial loss the family would incur if the insured person were to pass away today. It is usually calculated by taking into account a number of factors including but not limited to the insured individual’s age, gender, planned retirement, age, occupation, annual wage, employment benefits, as well as the personal and financial information of the spouse and/or dependent children.
So if we were going to use our extreme example of Kayne West (and if we are going to assume Forbes’ numbers are accurate) his earnings were $35,000,000 last year. Obviously buying a policy that is one-third his earning capacity for one year is not properly valuing his life.
If we were going to bring this to the normal person, if you are making $75,000 do you think buying only $25,000 worth of life insurance is proper protection for your survivors? I would assume not.
The calculation would probably be a little bit trickier to calculate because who knows how many years Kanye can work for as a high earning rapper? He could have a career that spans decades like Dr. Dre or he could end up doing a reality television show based on saving his marriage on VH1 like DMX.
Needs Based Life Insurance Calculation
Calculating life insurance need based on need will take in a lot of different factors:
- Annual spending needs
- Mortgages and other debt
- Other assets
- Other streams of income that may continue after death
- Will distribution
- Obviously other life insurance
I am going to make the assumption that $10,000,000 even invested at ridiculous rates would not satisfy the outstanding mortgages and annual spending needs of Kim Kardashian. There is also the “need” that most life insurance agents aren’t trained to take care of and that is estate tax need. If Kanye is worth $90,000,000 then his estate is going to need a lot more than $10,000,000 of cash. But I digress.
If we were going to bring this idea to a more normal level of lifestyle you would take in how much your family needs per year? everyone’s ages? survivor social security? whether college needs to be funded? does your surviving spouse work? Do you want them to have to work when you can insure against that for years to come? What investments do you already have? What side income continues? do you have a buy-sell on a business? What mortgages or long term debt can be paid off? etc.etc.etc. You could build your own spreadsheet or you can meet with a life insurance professional (note: there are plenty of people in the business that should not be called professionals).