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Leave Money Behind Like a Millionaire

Written by Aaron Pinkston, Tue, Jan 26 2010

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Ever wish you were worth a million dollars or more? You may already be. The reason you may want to leave money behind like a millionaire is because protecting your legacy might cost a million dollars or more.

The whole point of life insurance is to protect the loved ones you will leave behind when you pass on. If you don’t love or care about the people who are listed as your beneficiaries, don’t leave them the money. But have you ever stopped to consider how expensive you might be to replace?

Lets suppose you are an upper-middle class income earner with a little bit of savings tucked away. You make $70,000 a year in salary. And so far, you have been able to save up $100,000 in cash or liquid investments. Go you.

But should you pass, you want to be able to replace your income to your spouse and kids to make sure they live the life you want, even if you couldn’t. How much life insurance should you buy?

There is no hard and fast rule about the amount of life insurance you need. In fact, there are a lot of different theories out there, but most of them point in the same general area. The quickest and easiest formula I have seen to calculate income replacement is to take your income, divide it by your survivors’ expected rate of return over a long period of time, and subtract any savings or assets that would be liquidated upon your death. If you need life insurance for a reason besides income replacement, this is a horrible formula to follow.

In this case, let’s assume your spouse feels comfortable earning a 6% rate of return. (Remember it’s your spouses rate of return not yours because you won’t be around to manage the money any more.)

Here’s how much life insurance you would need:
$70,000 divided by .06 minus $100,000 equals $1,066,667

A little over a million dollars, managed at about 6% should be able to replace your income for a while with the extra hundred thousand thrown in.

To prove it do the reverse calculation:
$1,066,667 plus $100,000 is $1,166,667. That multiplied by .06 equals $70,000

Try filling in your own numbers to see how your current life insurance coverage matches up now. It only takes 10 seconds.

If you are the analytical type, you might be thinking, “but my income needs might decrease because I won’t need to pay for myself anymore.” That is true, but the formula also doesn’t account for inflation. Those forces tend to balance each other out. There are more specific ways to calculate your life insurance need, but this is a good starting point for discussion.

And that’s the point. Now you know you might be worth a million dollars or more, it’s time to talk about it with your spouse or partner. You want to make sure they are taken care of – even if you can’t be here in person. So go ahead and figure out how much life insurance you need.

Of course, the good news is that getting coverage for a million dollars of life insurance has been getting easier and less expensive over time. A life insurance policy that protects your family with the right amount may be more affordable than ever before. And then you can leave money behind for them like a millionaire – even if it doesn’t sound so glamorous any more.