Parents often ask: Do we need life insurance? How much? What kind?
Consider this: More than a third (35 percent) of U.S. households would feel a financial pinch within a month if the primary wage earner died, according to a recent study (2018 Insurance Barometer Study, Life Happens and LIMRA).
If you have minor children or other dependents, this is the most obvious reason for having life insurance – to provide for them financially. Would your spouse’s income cover all your family’s expenses, including food, housing, transportation and medical costs? Do you have enough savings to pay these as well as future expenses such as college and retirement? Most people don’t, so they need a plan to cover those costs.
How much you pay for insurance will depend on choices you make when choosing among various types of life insurance policies. Start by looking at your family’s specific needs.
1. Who needs my help?
Who depends on you now, and who may need your help in the foreseeable future? The answer could include your children, perhaps a parent who may need help in the future, or others in your care. List their names down the left side of a sheet of paper, and leave plenty of room next to each name to add additional information about your current and potential dependents.
2. How much will they need?
Determine how much you now provide for each dependent. Consider how much you spend monthly for your household, then, back out the amount you figure goes to provide for you – your share of the groceries, your clothing, vehicle and so forth. Consider that your spouse will face the same mortgage payment.
Check into other sources of funds. Social Security survivor and dependent benefits will probably be available. Do you have pensions, or a group life insurance plan? Consider whether other relatives would be inclined to help provide for your children. Once you’ve come up with a rough total, divide it up among your dependents, and write an annual amount on the line for each.
3. How long will they need help?
How long will each of your dependents and potential dependents need financial support, if something were to happen to you today? When assessing your life insurance needs, always begin with the assumption that you are no longer around to provide support. If you plan for the worst-case scenario, you’ve done the best planning you can.
You’re going to have to do some guessing, especially in the case of potential dependents. Do the math (amount per year times the number of years), and put the total sum for each dependent on their line. Then write down the total for that column and draw a circle around it.
4. Will my spouse continue to work?
Whether or not your spouse is working now, they will need time off after your death to hold tight to the children, to grieve, to handle arrangements and paperwork. And they’ll probably only be able to move at half-speed for months. Plan to give them some time. At a minimum, assume your spouse will not work for six months following your death. Yes, these things are difficult to think about. But they are much easier to think about now – while you’re part of the conversation – than they will be when you’re not around.
Estimate the number of years from the time your spouse resumes work until the time you expect your dependents will no longer need financial support. Multiply that number by an estimate of your spouse’s annual earnings (a larger number if your spouse is a brain surgeon; a smaller number if your spouse is a teacher’s aide). Subtract that total from the number in the circle.
What you end up with is a very rough approximation of what it will take to provide for your family. It’s probably more money than you thought. You didn’t realize you were so valuable, did you?
These are the initial questions to answer when considering purchasing life insurance. Once you know what your goals are you can begin investigating life insurance policies that can help you meet them.
Pamela Yellen is founder of Bank On Yourself, a financial investigator and the author of two New York Times’ best-selling books, including her latest, The Bank On Yourself Revolution: Fire Your Banker, Bypass Wall Street, and Take Control of Your Own Financial Future (2015, Hayward-Yellen 100 Ltd. Partnership). Pamela investigated more than 450 financial strategies seeking an alternative to the risk and volatility of stocks and other investments. Learn more at BankO