The Amount of Your Life Insurance Should Keep Pace with Your Success

Many people who have worked hard over the years have also enjoyed watching their income grow substantially — and with this financial success, their standard of living has gradually risen. Both circumstances represent a change for the better, but at the same time, a larger income and a higher standard of living also increase the amount of life insurance coverage needed. Why? Consider this example:

At age 35, Tom Smith is earning $100,000. He has purchased a life insurance policy for $1 million. Tom is comfortable with $1 million because it will provide 10 times his salary — enough, Tom calculates, to support his family.

Tom's salary increases 5% annually. By the time Tom reaches 50, his salary has doubled to $200,000. Tom has worked hard to get ahead, and he's quite proud of his accomplishment. However, his million-dollar coverage now has shrunk to five times his salary. Plus, Tom has three children, and only one has completed college.

At 65, with those 5% increases, Tom is earning $400,000 a year. And now if Tom dies, his $1 million coverage provides only two-and-a-half years of his salary. As Tom earned more and more money, he lost sight of his life insurance goal: his coverage did not keep pace with his earnings.

Long-term strategies
Does Tom still need life insurance at 65? He's earning a very good salary, and Tom's children have been educated — that financial obligation is behind him. But before you answer, consider these two factors:

1. Standards of living. Most people live at their income level. As they earn more, they spend more. They buy a bigger house, better cars, and take more luxurious vacations. As Tom earned more money, his family became used to an ever higher standard of living. He and his wife bought increasingly larger homes and a vacation home. They still carry mortgages on each.

   This is the great irony of Tom's case. If Tom suddenly dies of a heart attack at age 65, his life insurance benefits may not support his spouse's current lifestyle. Tom's policy is based on a way of life that he and his wife enjoyed when they were 35.

   If Tom's life insurance provides only 2 1/2 times his annual salary, his spouse is going to have to stretch his life insurance benefit for many years — which brings us to the second factor.

2. Longevity. Thirty years ago, Americans expected to live about 75 years. Today, we have very different expectations about long life. People are currently living into their mid-80s — and beyond. So if Tom dies at age 65, his healthy spouse could likely have 30% or more of her life still ahead of her.

Reassessing for the long term
As Tom's story illustrates, to protect your beneficiaries, life insurance should keep pace with your earnings. Therefore, you should regularly review your life insurance coverage with your financial representative. Together, you can develop strategies to ensure that your coverage will support your current lifestyle.

Goals change too
Let's say that you have lived conservatively, saved and invested over the years, and amassed enough wealth that you no longer have to concern yourself with your beneficiaries' financial well being.

Under these circumstances, you might begin thinking of other uses for your life insurance. Your policy can help fund your grandchildren's very expensive college education — or you may want to leave a legacy to medical research, a favorite charity, or your alma mater which you credit with helping you succeed. Your life insurance policy can do that for you if you review your policy with those goals in mind.

Life isn't static. As your life changes, don't overlook adjusting your life insurance coverage. Regularly talk to your Northwestern Mutual Financial Network representative to be sure that your coverage continues to meet your current needs.

The Northwestern Mutual Life Insurance Company, Milwaukee, WI.