Good question to have answered and one that does not have a specific answer either. How much life insurance you need is a question that is specific to the financial dynamics of your life. Any debt, obligations, spouse, business and or kids. Not having a complete picture would generate a generic answer that could be way off from your real needs.
In this short article, I will try to get you thinking about what you need to decide as you are considering the purchase of life insurance for your family.
First and foremost, you should never purchase more life insurance than your budget will afford you. People tend to drop coverage if money is tight. At that point, you are uninsured, all peace of mind/certainty is gone because your family and/or business interests are not protected. All the risk is back on the table. Better to buy what you can afford before all else. Remember, this is all part of proper financial planning.
Many financial entertainers or financial “gurus,” even some agents/brokers will tell you 8-10 times your income. Now, I simply don’t agree with that cookie cutter formula.
Do you need temporary (term life insurance) or permanent life insurance? Should it be blended? Typically as we age our financial obligations become lower. The home is paid off, kids are thru college etc. and our paycheck at work has peaked allowing us greater savings and investment opportunities.
What I/we recommend is a complete needs analysis to determine what amount of life insurance is ideal to meet your goal. It is the only way life insurance can be dialed in to accurately determine your specific needs.
With the needs analysis, we (both agent and interested consumer) are determining all the expenses that the policy beneficiary(s) will need for a certain period of time. The needs analysis is the best method I know of for determining how much life insurance is needed.
Here is a common but fictitious example….a family of 4 with 2 children ages 2 and 4. The parents have a 30 year, $200,000 mortgage on their home with 25 years of remaining payments and revolving credit card bills. They also have college aspirations for their 2 children. Now, Mom stays at home with the kids and is unemployed since the birth of their first child. Now, the concerned husband (potential life insurance applicant) is worried that if he was killed in a car wreck or died of a health condition such as a heart attack, that his family’s future would be difficult at best. His wife would have to go back to work for questionable pay while the kids enter daycare. The kids college fund would not come together so they can attend college without huge loans… if at all. Mom and the kids would also lose the family home and not be able to pay off car loans.
So our goal here is…we have to insure his life till his children are at least 21 and the house is paid off which is another 25 years. How much is college going to cost, the mortgage payoff, what is the payoff on the autos and credit card balance(s)? What would his wife need income wise to cover herself, the children till they are young adults including food, clothing, college education, medical and dental expenses? 20 year term life insurance would probably be an appropriate to seriously consider in this case if only temporary coverage is desired.
Incidentally, what if the husband lives and his wife, the stay at home mother passes unexpectedly? Breast cancer and car wrecks claim the lives of many young mothers. Don’t kid yourself on these matters!! I’m in my early 50’s at this time and have seen plenty of sad things happen to friends and policy owners along the way. I think we all know about car wrecks, but I know of many men who lost their wives in their early 40’s to cancer. One high school friend of mine of had 4 children. Mom was a stay at home mother.
Is something like this going to create financial problems beyond the terrible grief the family has with the loss of her life?
You bet it will!
Stay at home parents may not receive a paycheck, but their contributions are worth a lot of money!! Just consider how much a nanny or day care expenses are. Combine this with hiring a cleaning company.
Remember, it is a team effort to raise a family and take care of your home. Life insurance should always be on both parents.
Beyond the monetary basics is consideration as to the lifestyle you would want your spouse to have in your untimely death. Do you want to financially insure the full financial value of your life to assure the family would be able to live the lifestyle you envisioned? What would have to change in order to move on? How much would that cost per year and how many years would the money be needed?
Remember, life insurance is very affordable when working with an independent life insurance agent/broker that knows how to structure the right plan for you. He or she will know your specific situation and whom to place your business with.
Make sure you work with someone who is open minded and seasoned. This is someone who can help you sort out your actual needs. Getting it right from the beginning is an important step in protecting your family from the terrible financial impact that occurs with the death of a loved one.
At Special Risk Life, we are here to help. Don’t fret even if you have been declined for life insurance before. We handle the tough cases and work with carriers that can make you a good offer. Reach out and contact us today at 800-598-6445 or contact us here.