Income replacement is one of the biggest things to consider when determining the amount of coverage needed in a life insurance policy. Financial professionals offer several different formulas to calculate income replacement. One of the simplest formulas takes your annual income and subtracts your personal expenses. For example, let’s say you bring home $50,000 per year. Some of that money will be spent on your personal needs (not family needs). If you are no longer alive, then you are no longer spending money on personal needs. That’s why personal expenses are subtracted from annual income. A common assumption is that 25% of your annual income is devoted to personal expenses. Financial professionals recommend a minimum of 5 years income replacement.
There are some decent life insurance calculators available, but one assumption they all make is that your income is the only income that needs replacement. Grieving affects many things, including job performance. Some surviving spouses may require a long time to grieve, so their job performance may be affected long term. Grief may even cause someone to lose a job. I don’t claim to know the statistics on grieving and job performance, but one thing makes intuitive sense: jobs that require a great deal of creativity are most affected by grieving. On the other hand, jobs that require repetitive manual labor are probably the least affected.
Job performance may also be affected if the surviving spouse has young children. Time may be needed away from work in order for a parent to provide emotional support for grieving children. In conclusion, it’s good to consider the income of both spouses for life insurance coverage even though only one spouse is being insured with the policy. If you have any questions, don’t hesitate to send me a message.