A million dollars sounds like a lot of money, but how far does it really go?

Consider a young husband and wife, both 35 years old. To keep things simple, we’ll assume that there aren’t any kids in the picture. They’re both gainfully employed, and both bring in about $50,000 a year. Tragically, the husband passes away leaving his wife behind – but she’s not worried, because he had a life insurance policy with a large enough benefit to make her a millionaire.

And oh, what a dangerous line of thought that can be.

When a family member passes away, it creates an obvious and severe interruption to the family’s life and future plans. The house they bought together, the kids they planned to have, the retirement accounts to which they’ve both contributed – the status of everything changes all at once. What’s worse, the sudden loss of income into the home means that the negative impact of these financial changes can be multiplied.

Yet oftentimes as independent insurance agents, when we’re discussing income insurance with our clients, we find that it’s an idea that is occurring to them for the first time. Our hypothetical couple just lost not just a loved one, but $50,000 worth of household income as well. Now that the bills have to be paid from a single paycheck, the remaining $50,000 will dry up quickly. Ready for the dose of reality?

Take that million dollar life insurance benefit and spread it over the next thirty years, giving our client thirty years of income. Let’s assume that they can get 2.5% on their money (and in today’s low interest rate environment, that’d be a good find). That comes out to just under $48,000/year in income.

A million bucks, and we didn’t even fully replace the deceased spouse’s income. Never mind the cost of the funeral. Don’t think about what would happen if the couple had a child, and they wanted to use some of those proceeds to pay for college tuition. The surviving spouse wants to buy a new home because the one they’re in now reminds them of their departed loved one? That million dollar check isn’t buying a custom-built dream home – it’s just enough to make sure you can continue to live comfortably.

Of course, household overhead will likely decrease when a family member passes away. That overhead can be decreased further by using a portion of the life insurance proceeds to pay off debts, wipe out a mortgage, or take care of college planning all at once as opposed to saving over the course of years. But those things all take money, and we ultimately end up back at the same spot – your clients can use part of the benefit to pay off bills and reduce their overhead, but at the end of the day they’ll either need money for that or money for income.

What if our hypothetical couple had a greater disparity in their income? Maybe he makes $70,000 a year and she makes $30,000. In this example, if the husband of the couple were to pass away, his widow’s financial situation would be even more stressful than the one we explored a moment ago – proportionally, she has lost a greater chunk of her household income and now the remaining portion will have go twice as far as it used to. Or what if the wife makes $100,000 a year while our husband is a stay-at-home dad to two kids? If the wife passes away, we have immediate and enormous concerns regarding income, overhead, and childcare. Without enough insurance the father will have to work to make ends meet – and that means incurring new childcare costs on top of all of the other stress.

So what do we do? Here the golden rule when it comes to insuring against lost income: your clients need between $1,000,000 and $5,000,000 worth of life insurance for every $50,000/year they make. It might sound like overkill, but it doesn’t go as far as you might think – especially with interest rates as low as they are today.

If we take a $1,000,000 life insurance benefit and look at it in terms of the income it can provide over the next thirty years at 1% interest, it comes to about $38,800/year. At 4% interest it’s about $57,700/year. Sounds about right if we want to insure against the loss of a $50,000/year income, right? The numbers add up because it’s such a long time horizon. You can also see what a dramatic impact the interest rate has on our ability to create income, too.

We often think about life insurance in terms of the immediate assets it can create, but when we’re talking about family planning we’re talking about clients who will need income, not just assets, if a death were to impact their household. That need for income won’t evaporate after a year or two – it’s likely to be a lifetime concern, and that means we must make sure there’s enough money to cover that need for years to come.

So the next time you’re writing a $100k life policy, remember to take a second look at that fact finder – have you considered the impact of lost income on your clients’ financial stability?