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).
If Kayne has a net worth of $90 million, wouldn’t that more than cover their outstanding mortgages and debt? I know they bought a new place recently, but I would think that net worth would cover a lot.
I also think the other streams of income (music royalties) that would continue after Kanye’s death would cover up much of the other debts – perhaps all the debt. Let’s not forget that Kim has earning power as well.
I also don’t think we should confuse Kim Kadashian’s annual spending needs with what she spends today. If I had millions and millions maybe I’d bath daily in MonaVie, but if that income were stop, I don’t think one could make a case that such expenses are part of my annual spending needs.
I would also think that people who are making millions and millions, could fund their own life insurance policy very easily by putting aside some money in a safe place. I think Suze Orman has something like $20 million in treasury bills. As long as she’s paid off her debt, if she has a child, there’s little need to get a life insurance at all since the child will inherit the $20 million (assuming good estate planning). She doesn’t need to go buy a $5 million policy in addition to that as the child’s well-being doesn’t hinge on whether he/she would have $20 or $25 million dollars.
If Kayne has a net worth of $90 million, wouldn’t that more than cover their outstanding mortgages and debt? I know they bought a new place recently, but I would think that net worth would cover a lot.
– Maybe. If you are spending a Million a year, then you are right everyone is covered, but if your “spending” is upwards of $10mil then probably not.
I also think the other streams of income (music royalties) that would continue after Kanye’s death would cover up much of the other debts – perhaps all the debt. Let’s not forget that Kim has earning power as well.
– VERY VERY TRUE. This would be taken into account for both the HLV calculation and the Needs based.
I also don’t think we should confuse Kim Kadashian’s annual spending needs with what she spends today.
– Once a luxury now a necessity. Personally, if I were Kanye I’d be worried that someone like Kim is not going to be single forever. Just not going to happen, and my son and/or daughter will have at least one more step father. For me, that would force me to look into very tight, very controlled estate planning measures (which is the second thing wrong with the article – ownership/beneficiary is all messed up).
Lastly, I think there is something that must remembered that $20 or $90 isn’t really $20 or $90million. It is approximately half due to estate taxes. So if Kayne’s $90 would quickly get down to probably between $40 and $55million depending on his domicile State. Very sizeable sum still, just not $90 – this can be solved for pennies on the dollar if he is healthy with life insurance. It would also take care of the liquidity need if that $90 is in illiquid dollars.
Take Joe Robbie as an example. I think we can agree that if you own the dolphins you are a pretty freaking wealth guy. He died with no liquidity. So when his family owed $47,000,000 to the federal gov’t his family had to have a fire sale on the team OR when Estee Lauder died her heirs had to unleash $55,000,000 of shares on the open market to pay their tab.
The high net worth market for estate tax purposes is so huge that most fortune 250 life insurance companies were lobbying against the exemption being increased.
So in the end, we really can’t even guess at the life insurance needs without knowing the debts and liquid assets they have, right? I don’t know a thimbleful about estate planning in comparison to you, but it would seem strange that the government would take half in taxes and not allow the opportunity to pay off outstanding debts.
Example: Let’s say that Kayne has debts of $50 million (mortgage and otherwise). His $90 million in net worth (presuming it’s liquid, which is unlikely, but let’s go with it) should be able to pay that off resulting in a taxable $40 million. I hope it’s not a situation where they tax the $90 million and the heirs are left with $45 million to pay off $50 million in debts.
I’ll file away the Joe Robbie lesson for 4 lifetimes from now. When I have 9 figures worth of month of millions, pay off the 8 figures of debt as quick as possible ;-).
You are right in terms of paying of debt. But when I think of net worth that is after debt. So using your example it would be $40mil net worth and the estate would owe $20ish in taxes.
Don’t file that Joe Robbie Lesson away! In New York lets say someone has $2mil in real estate NO CASH (extreme Example) without atty fees and court fees they still owe New York about $99,000. Where is that coming from?