How Much Is Your Life Insurance Deductible?

In one of our trade magazine I read an article comparing life insurance to auto insurance.  At first I thought how in the world is that even possible to compare.  It’s apples and oranges…isn’t it?

When you have an accident with your car you have a deductible relative to the damage, if you carry collision and comprehensive coverage, that you caused or was caused.  The deductible is a small, relatively speaking, amount of maybe 500 or 1000 dollars and the rest your insurance company pays.

When you die the deductible is what is left over to be paid once your death benefit is exhausted.  So to make it clear I will use an example of a possible hypothetical situation.  Assume a family of 4 with an annual income of 100k dollars a year.  Husband and wife each carry 250k in term life.  Mortgage is at 175k dollars and the first of the two kids is 6 years away from college age.  If one of the parents dies, that 250k in term coverage will go only so far.  If both parents were breadwinners for the family the life insurance will last about 5 to 7 years to keep the family living with their current lifestyle.  EVERYTHING ELSE IS THE DEDUCTIBLE.  So, college savings, vacations, extra activities, credit card payments, braces for the kids etc. will all still be there without the two consistent incomes.

Planning for death is more about making sure that what you want to happen if you are gone will happen.  Being focused on the annual premium only can cost more for your family in the case of you being gone.  Another issue that we run into is people believing that someone could get rich from life insurance.  That is not possible unless the person plays the lottery with the money and wins.

Do the math yourself.  If you make 50k a year in income and you have 250k in life insurance.  If you die most of the expenses you had – your family will continue to have so that money will last approximately 5 years to keep the same lifestyle they had.  If you had 500k in term then there will be about 10 years… you get the picture, right.  Some would argue that since you are gone some expenses will go down.  That is true, but some expenses will go up.

So, if you have not thought about life insurance in these terms I suggest you do the math and see where you are at.