SoFi

If you’re reading this, you’ve probably already decided that you are going to buy life insurance. Smart move: Life insurance will, in the case of your untimely death, protect your loved ones. If you keep up with your monthly premiums, your beneficiaries will receive a lump sum payment that will help them replace the money you would have otherwise earned. Expenses like your mortgage, a child’s education, monthly utilities and more need to be factored in.

Wondering how to do the math? Let us help you out with some simple methods for calculating that amount of coverage that will give you peace of mind.

How to Manually Calculate How Much Life Insurance You Need

Here’s a great way to get started: Take out a piece of paper or open a document on a computer and start making lists. In one list, you are going to look at all the financial obligations that lie ahead. In another, you’ll consider all the assets you have that could be used to fund these expenses for your loved ones if you were not around.

For the financial obligations ahead, make sure you come up with a figure that includes:

•   Your income over the term of the insurance policy.

•   Daily living expenses (food, utilities, medical care) if you don’t think the income in the line above would cover that sufficiently.

•   Your mortgage. If this is covered by your income, you don’t need to add this, but if not, you want to make sure your loved ones can pay this loan off over the years.

•   Any other debts. Do you have a chunk of credit card debt? Student loans? Those will need paying. Also think about end-of-life costs. Grim as it may be, you don’t want loved ones struggling to pay for funeral costs. These are not insignificant. In 2021, the cost of a funeral and burial was typically almost $8,000. In addition to that, there may be additional costs for gravestones, an obituary, and the like.

•   Tuition. Think about how many children you have or plan to have. The current annual cost for an in-state student at a public 4-year institution is $25,615; for a private university, that number rises to $53,949. Don’t forget to account for inflation, too.

•   Childcare if applicable. Think about whether your income alone would cover this, or if more funds would be needed to pay for these costs.

Add these costs up, and those are your life insurance needs. But now, let’s look at assets that might go towards paying these costs were you not alive. Include the following:

•   Savings. What do you have in savings (include your retirement accounts if you believe your loved ones would tap into those versus keeping them aside)? Also look at any investment accounts you may own.

•   Other insurance policies. You may already have some insurance. Just keep in mind if it is something you have via a group life insurance policy at work, it will probably end if and when you change jobs.

•   College funds. If you already have, say, a 529 account that will help pay for your children’s higher education, add that to the assets list.

To find out how much insurance you need, take the first number (your financial obligations to be covered) and subtract from it the assets you have (the second number). Ta-da: You now have a number that you’d like your life insurance policy to at least equal.

3 Ways to Quickly Estimate Your Life Insurance Needs

Not everyone wants to do the math above, we get it. Here are a few other ways that may be a better match for you when it comes to estimating how much life insurance you need.

1. The DIME Formula

The DIME formula — an acronym that stands for debts, income, mortgage, and education — is a time-tested way to determine the right amount of life insurance to buy. Here’s how it works:

Debts Add them up, including car loans, student loans, personal loans, credit card balances (even if it’s a cringe-worthy number you plan on whittling down, you’ve got to include it), and so forth. Include everything except mortgage payments — because that’s the “M” portion of this formula — and add them up. What’s the total?

Income The goal of having a life insurance policy is to replace income that was coming in but would stop because of the death of the policy holder. Multiply your income and the potential number of years you want covered by life insurance.

Mortgage If you’re a homeowner, what balance remains on your home loan? If you are considering buying a home, what size mortgage would you get?

Educational costs If you have or are planning to have kids, estimate how much tuition would cost for each and determine the total needed to fund higher education.

Add up these D, I, M, and E amounts, and that’s how much life insurance coverage you need. Worth noting: This technique doesn’t recognize any assets you might have, so it might tend to have you buy more life insurance than you need.

2. Use an Online Calculator

Sometimes it’s easier to use a digital tool that holds your hand through calculations like these. If you love clicking your way to answers, try a life insurance calculator to help streamline the process. Many are available online.

3. Try the Multiplication Trick

Some people like to use a formula to figure out how much life insurance they should get. Typically, this says to take your income, multiply it by a number (usually 10, but sometimes much lower or higher) and bingo! That’s the amount. Prevailing wisdom, though, is that this can be a very inaccurate figure. And it certainly doesn’t take into account the subtleties of your situation, whether that means you have to pay whopping student loans from grad school, alimony, caregiving expenses for a parent, or another expense. So while you may hear about this shortcut, it’s not considered reliable.

Who Needs Life Insurance?

Many people would benefit from life insurance, and most Americans do have a policy. Buying life insurance protects your dependents in the event of your dying; it provides a lump sum payment that can keep them financially afloat.

If, however, you are a person without dependents or any shared debt (such as being a co-signer with your parents for a student loan or with a partner on a mortgage), then you may not need to buy a policy. But for those who do have people depending on their earning power, life insurance can be a wise buy.

Many people get a policy when they are anticipating the major “adulting” milestones of marriage or parenthood. It’s likely to be particularly important if you are the primary earner in your marriage. If tragedy were to strike and you died, your spouse could be hard-pressed to maintain their standard of living and pay the bills. The rule of thumb is that the sooner you get insurance, the better. Rates go up as you age.

Next Step: Buying Life Insurance

Once you know how much life insurance you need, it’s almost time to start shopping. Almost. Let’s take a quick look at the two main types of life insurance, term life versus whole life insurance — and the key differences between them.

Although they share the same goal of protecting families financially when a tragic loss occurs, the elements of the policies, how much they cost, their terms, and more can be quite different.

Term Life Insurance

As the name suggests, this kind of policy lasts for a certain period of time, or term. The policy is taken out for a designated dollar amount, usually with fixed premium payments — and, if the policy holder dies during that time frame, then designated beneficiaries can receive the payout they’re due. This can work well for people who think that, at the end of the term, they’ll have saved enough money that they no longer need income replacement. Or, they may believe that beneficiaries will have gained financial independence by the time the policy ends.

Whole Life Insurance

This option offers coverage for your “whole life” as the name suggests, and is a popular choice among the different kinds of permanent, or lifelong, insurance policies. Payments are typically higher, perhaps as much as five to 15 times more than the same amount of coverage as a term life policy, but part of this whole life premium is a contribution to the policy’s cash value account. This savings vehicle can grow and may be borrowed against if needed.

Choosing Term or Whole Life Insurance

If affordability is especially important, then term life insurance can make more sense. Term life may also be the right choice if coverage is only needed for a certain period of time, perhaps while money is still owed on a mortgage or young adult children are in college.

Another reason why some people may choose term insurance is because they take the difference between that premium and what they’d pay for a whole life premium, and then invest those dollars in another way.

That said, some people prefer the ongoing coverage of whole insurance and the peace of mind it can bring. Others may like watching their cash account grow. It’s a personal decision; only you can judge which kind of life insurance best suits your specific needs.

The Takeaway

Buying life insurance is an important step. It secures the financial future of your loved ones who rely on you and your income. Figuring out just how much life insurance you need is a necessary part of the process that can feel complicated. Fortunately, there are a number of different ways to get a solid estimate for that figure. The ideas we’ve shared not only help you do just that, they may also give you a deeper understanding of you and your family’s financial future.

Let SoFi Help Protect You

Once you have a rough idea of how much life insurance you’d like to buy, why not consider what SoFi is offering: affordable term life insurance in partnership with Ladder. Applicants can receive a quote in just a few minutes for policies that range from $100,000 to $8 million. It’s quick and easy to set up a policy, and the coverage amount and associated premiums can be adjusted at any time with just a couple of clicks. No hassles.

Rates are competitive with Ladder and, because the agents do not work on commission, there are no fees. Plus there are no medical exams required for qualifying applicants buying $3 million or less in coverage.

Interested in the fast, easy, and reliable route to life insurance? Check out what’s offered by SoFi in partnership with Ladder.

---

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Coverage and pricing is subject to eligibility and underwriting criteria.
Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers- for further details see ladderlife.com. All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products.
Ladder, SoFi and SoFi Agency are separate, independent entities and are not responsible for the financial condition, business, or legal obligations of the other, Social Finance. Inc. (SoFi) and Social Finance Life Insurance Agency, LLC (SoFi Agency) do not issue, underwrite insurance or pay claims under Ladder Life™ policies. SoFi is compensated by Ladder for each issued term life policy.
SoFi Agency and its affiliates do not guarantee the services of any insurance company.
All services from Ladder Insurance Services, LLC are their own. Once you reach Ladder, SoFi is not involved and has no control over the products or services involved. The Ladder service is limited to documents and does not provide legal advice. Individual circumstances are unique and using documents provided is not a substitute for obtaining legal advice.

SOPT20010

Read more

Exchange-traded funds or ETFs generally fall into two categories: actively managed and passively managed. Actively managed ETFs, a growing category in the ETF market, are overseen by a portfolio manager.

The goal of an active manager is to outperform a certain market index, which they use as a benchmark for their portfolio. By contrast, passive ETFs simply mirror the performance of a particular market index; they don’t aim to outperform it.

There are two types of actively managed ETFs: transparent and non-transparent. Active non-transparent ETFs are a new option that was introduced in 2019; these funds are sometimes called ANTs.

Keep reading to learn more about the distinction among different ETFs, the pros and cons, and whether investing in actively managed ETFs makes sense for you.

How Actively Managed ETFs Work

Actively managed ETFs employ a portfolio manager and typically a team of analysts who do market research and make decisions to buy, hold, or sell the assets held within the fund. Most ETFs are designed to reflect a certain market sector or niche. They typically measure their success by using a known index as their benchmark.

For example, a technology ETF would be invested in tech companies and potentially use the Nasdaq composite index as a benchmark to measure its performance.

Despite the fact that passive (or index) ETFs strategies predominate in the industry — index ETFs represent roughly 98% of the ETF market — active strategies are gaining ground. That said, it has been historically quite difficult for active fund managers to beat their benchmarks.

Actively managed transparent and non-transparent ETFs are similar to traditional (i.e. index) ETFs. You can trade them on stock exchanges throughout the day, and investors can buy and sell in amounts as small as a single share. Broad availability and low investment minimums are an advantage that ANTs (and ETFs more generally) boast over many mutual funds.

Actively managed transparent ETFs

When exchange-traded funds first appeared some 20 years ago, only passive ETFs were allowed by the Securities and Exchange Commission (SEC). In 2008, though, the SEC introduced a streamlined approval process that allowed for a type of actively managed ETF called transparent ETFs. These funds were required to disclose their holdings on a daily basis, similar to passive ETFs. Investors would then know exactly which securities were being traded within the fund.

Many active fund managers, however, didn’t want to reveal their trading strategies on a daily basis — which is one reason why there have been fewer actively managed ETFs vs. index ETFs to date.

Non-transparent or semi-transparent ETFs

In 2019, another rule change from the SEC permitted an active ETF structure that would be partially instead of fully transparent. Under this new rule, an active ETF manager would be allowed to either reveal the constituents of their portfolio less often (e.g. quarterly, like actively managed mutual funds), or communicate their holdings more obliquely, by using various accounting methods like proxy securities or weightings.

The SEC ruling opened up a new channel for active managers, and since then the number of actively managed ETFs has grown. According to Barron’s, in just the past two years the number of actively managed ETFs has more than doubled. Nearly 60% of the ETFs launched in 2020 and 2021 were actively managed — more than all the actively managed ETFs established in the past decade.

From an investor’s perspective, the most noticeable difference between these two kinds of actively managed ETFs — transparent vs. non-transparent — would be the frequency with which these funds disclose their holdings. Both types of ETFs trade on exchanges at prices that change constantly during trading days; both rely on a team of managers to select and trade securities.

Index ETFs vs Active ETFs

So what is the difference between index ETFs and actively managed ETFs? It’s essentially the same difference that exists between index mutual funds and actively managed mutual funds.

How do index ETFs work?

Index ETFs, also called passive ETFs, track a specific market index. A market index is a compilation of securities that represent a certain sector of the market; indexes (or indices) are frequently used to gauge the health of certain industries, or as broader economic indicators. There are thousands of indexes that represent the equity markets alone, and Well-known indexes include the S&P 500®, an index of 500 of the biggest U.S. companies by market capitalization, as well as the Russell 2000, an index of small- to mid-cap companies, and many more.

Because index ETFs simply track a market sector via its index, there is no need for an active, hands-on manager. As a result the cost of these funds is typically lower than actively managed ETFs, and many active and passive mutual funds as well.

How do actively managed ETFs work?

Actively managed ETFs, often called active ETFs, rely on a portfolio manager and a team of analysts to invest in companies that also reflect a certain market sector. But these funds are not tied to the securities in any given index. The ETF manager invests in their own selection of securities, but often uses an index as a benchmark to gauge the success of their strategies.

Transparent actively managed ETFs must reveal their holdings each day.

Actively managed non-transparent ETFs, or ANTs, aren’t required to disclose their holdings on a daily basis. This protects asset managers’ strategies from potential “front-runners” — traders or portfolio managers that try to anticipate their trades. By and large, the cost of these funds is lower than transparent ETFs, and also lower than actively managed mutual funds.

Mutual Funds vs Actively Managed ETFs

All mutual funds and exchange-traded funds are examples of pooled investment strategies, where the fund bundles together a portfolio of securities to offer investors greater diversification than they could achieve on their own. In addition to the potential benefits of diversification, which may mitigate some risk factors, the pooled fund concept also creates economies of scale which helps fund managers keep transaction costs low.

That said, the structure or wrapper of mutual funds vs. passive and active ETFs, is quite different.

Fund structure

Although a mutual fund invests directly in securities, ETFs do not. With both active and passive ETFs, the fund creates and redeems shares on an in-kind basis. So when investors buy and sell ETF shares, the portfolio manager gives or receives a basket of securities from an authorized participant, or third party, which generates the ETF shares.

By comparison, mutual fund shares are fixed. You can’t create more of them based on demand. But you can with an ETF, thanks to the “in-kind” creation and redemption of shares. This means that ETF fund flows don’t create the same trading costs that might impact long-term investors in a mutual fund. And fund outflows don’t require the portfolio manager to sell appreciated positions, and thus minimize capital gains distributions to shareholders.

Pricing

The price of mutual fund shares is calculated once a day, at the end of the day, and is based on a fund’s net asset value (NAV). Investors who place a trade must wait until the NAV is calculated because most standard open-end mutual funds can only be bought and sold at their NAV.

ETFs, by contrast, are traded like stocks throughout the day. And because of the way ETF shares are created and redeemed, the NAV can vary, creating a wider or tighter bid-ask spread, depending on volume.

Fees

The expense ratio of mutual funds includes management fees, operational expenses, and 12b-1 fees. These 12b-1 fees are a type of marketing and distribution fee that don’t apply to ETFs, which trade on stock exchanges.

Thus the expense ratio for most ETFs, including actively managed ETFs, can be lower than mutual funds.

Pros and Cons of Actively Managed ETFs

As with any investment vehicle, these funds have their pros and cons.

Pros

Potentially for higher returns

One advantage of an actively managed ETF is the potential for gains that could exceed market returns. While very few investment management teams beat the market, those who do tend to produce outsize gains over a short period.

Greater flexibility and liquidity

Active ETFs could also provide greater flexibility amid market turbulence. When world events rattle financial markets, passive investors can’t do much other than go along for the ride.

A fund with active managers might be able to adjust to changing market conditions, however. Portfolio managers could be able to rebalance investments according to current trends, reducing losses, or even profiting from panics and selloffs.

Like passive ETFs, active funds also trade throughout the day (as opposed to some mutual funds who only have their price adjusted once daily), allowing investors the opportunity to do things like short shares of the fund or buy them on margin.

Cons

Higher expense ratios

One disadvantage of investing in an actively managed ETF is the potentially higher expense ratio. Active funds, whether ETFs or mutual funds, tend to have higher expense ratios. The costs associated with paying a professional or entire team of professionals combined with the fees that result from additional buying/selling of investments typically adds up to higher costs over time.

Each purchase or sale might come with a brokerage fee, especially if the securities are foreign-based. These costs exceed those of passive funds, resulting in higher expense ratios.

Performance factors

While active ETFs aim to provide higher returns, most of them don’t. It’s a widely known fact in the investment world that the majority of actively managed funds (as well as most individual investors) do not outperform the market over the long term.

So, while an active ETF may have the potential for greater returns, the risk of lower returns, or even losses, can also be greater. The chances of choosing an active fund that fails to outperform its benchmark are greater than the odds of choosing one that succeeds.

Bid-ask spread

The bid-ask spread of ETFs can vary, and while it’s more beneficial to invest in an ETF with a tighter bid-ask spread, that depends on market factors and the liquidity and trading volume of the fund. To minimize costs, it’s wise for investors to be aware of the bid-ask spread.

Investing in Actively Managed ETFs

Once an investor opens an account at their chosen brokerage, they can begin buying shares or fractional shares of actively managed ETFs.

Historically, brokerages have required investors to buy a minimum of one share of any security, so the minimum investment will most often be the current price of one share of the ETF plus any commissions and fees (many brokerages eliminated fees for buying or selling shares of domestic stocks and ETFs in 2019).

Some brokerages like SoFi Invest® now offer fractional shares, which allow for investors to purchase quantities of stock smaller than one share. This option may appeal to those looking to get started investing with a small amount of money.

It’s important to note that many ETFs pay dividends, which are payouts from the stocks held in the fund. Investors can choose to have their dividends deposited directly into their accounts as cash or automatically reinvested through a dividend reinvestment program (DRIP).

Investors with a long-term plan in mind might do well to take advantage of a DRIP, as it allows for gains to grow exponentially. For those only looking for income, DRIP might defeat the purpose of holding securities that yield dividends, however.

The Takeaway

Like mutual funds, exchange-traded funds or ETFs are considered pooled investments and generally fall into two categories: actively managed and passively managed. Actively managed ETFs, a growing category in the ETF market, are overseen by a portfolio manager. By contrast, passive ETFs simply mirror the performance of a particular market index; they don’t aim to outperform it.

Although actively managed ETFs make up only about 2% of the ETF universe, owing to regulatory changes in recent years this category has been growing. In fact there are now two types of actively managed ETFs: transparent and non-transparent. These funds offer investors the potential upside of active management, with the lower cost, tax-efficiency, and accessibility associated with ETFs. If you’re curious about actively managed ETFs, you can explore these products by opening an account with SoFi Invest®.

Learn more about investing with SoFi.

---

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.

SOIN20170

Read more