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Submitted by: Chad Olivier
Chad is owner of the firm The Olivier Group, LLC in Baton Rouge, LA., which specializes in retirement planning and wealth management . Chad is a contributing writer of Wealth Management articles for the Journal of the Louisiana Dental Assoc. Securities and Financial Planning offered through Linsco/Private Ledger Member NASD/SIPC. Please note that the article is for informational purposes only. Financial Planning requires detailed individualized analysis of each person's specific situation
Life is your most important asset. For all practicing physicians alike, income is based upon the services provided to patients. In the unfortunate event that something happens to you, it is necessary to know how this income loss will affect your family. How do you put a price on your most valued asset?
Determining an estimated amount of necessary life insurance can actually be quite simple. The first step is taking inventory of your current assets and your current liabilities. Here’s an example:
Dr. Provider
Assets Liabilities
House: $350k Mortgage: $250k
Car: $25k Car Loan: $20k
Investment Acct: $50k Student Loan: $120k
Savings: $35k Personal Loans $10k
Total Assets = $460k Total Liabilities = $400k
(Assets - Liabilities = Net Worth) Net Worth = $60k
Most likely, Dr. Provider’s spouse will not sell the house and car, greatly decreasing the significance of its fair market value in the life insurance equation. Let us look at the current liabilities in the example: $400k. If you subtract from this amount the investment account and savings assets, you are left with approximately $315,000 of debt upon your death. Then, include an additional $30,000 for burial expenses which gives a new total of $345k. So, Dr. Provider needs at least $345,000 just for his family to break even.
The next step in estimating an adequate amount of life insurance is to calculate the income amount necessary to keep the family at a certain standard of living. Dr. Provider’s family needs a minimum after tax total of $6k per month to maintain their current lifestyle. That adds up to $72k per year (not including inflation).
The simple equation for calculating the entire amount of life insurance is to divide the yearly amount of $72k by 4.5% (reasonable rate of return) equaling $1,600,000. Add in the $345,000 of debt to the $1,600,000 to reach a grand total of $1,945,000.
Dr. Provider should obtain a life insurance policy that will insure his life for at least $2 million. Applying this method leads to a simplified way you can estimate the amount of life insurance necessary to provide for your family.
Chad Olivier is owner of the firm The Olivier Group, LLC in Baton Rouge, La., which specializes in retirement planning and wealth management for physicians, dentists and other affluent individuals and families. Securities and Financial Planning are offered through Linsco Private Ledger Member NASD/SIPC. Please note that the above article is for informational purposes only. Financial planning requires detailed individualized analysis of each person’s specific situation.
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