I have previously written about how to calculate an appropriate amount of life insurance here and here, but I have come up with another way, and that is to ask yourself two questions. The first one is “How much is my life worth?” Go ahead and ponder that for a bit.
There are numerous ways to answer that question. You could answer it from a financial perspective, which is the usual manner in determining an appropriate amount of coverage. You could also answer it from a philosophic perspective, taking into account what you plan to accomplish in your lifetime. A spouse or a child might answer it much differently, as could a business partner or employee.
The financial formula is pretty straightforward: increase your current earned income by a percentage (your raises) for the number of working years you have left, then calculate the net present value of that number, and that’s an estimated dollar figure of what your life is worth right now. But is it?
That doesn’t take into account the return on the portion of your income that you don’t spend. Depending on your investing acumen, that could potentially dwarf your earned income.
Or you could put a figure on the philosophical value, but only you could do that, because only you know your hopes and dreams. It could be greater than the financial figure you computed if you are a big dreamer.
After you have computed (or decided) how much your life is worth, the second question to ask is “How much is it insured for?” Because why would you insure it for less than it’s worth?
If you computed or decided that your life is worth $5 million and you only carry $2 million of insurance, you’ve got some serious choices to make. First, you could scale back on your dreams, and hence your worth. Second, you could legitimately rationalize that your loved ones could maintain your current lifestyle with the $2 million, so nothing further need be done. Under this scenario, although your loved ones are provided for, your dream dies with you.
The obvious choice, to procure an additional $3 million of coverage, may not be possible due to financial or health constraints. But both are potentially solvable, and if your dream is a burning passion rather than a passing fancy, the odds are good that solve them you will.
Life insurance is a tool that allows us to have influence after we die. That influence is usually limited to our immediate family, but it doesn’t have to be. Its uses are only limited by your imagination. It can be used to fund a scholarship in your discipline, endow a chair at your alma mater, build a wing to the children’s hospital or any of a thousand other things that you might desire.
So when you have the time to contemplate some of life’s bigger issues, be it on a run, a walk on the beach, a hike in the woods, a weekend retreat (or a visit to Colorado), ask yourself these questions: “What is my life worth?” “How much is it insured for?”