Not a lot of people like to talk about life insurance, but one of the most important questions you should be asking yourself when you do talk about it is: Do I have enough? The general purpose of life insurance when you are talking about family planning is to provide funds to replace the income of someone who is no longer around to provide that income.
So how much should you have? In the past, many have just used the old “3 X your salary” formula, but we like to dive down a little deeper into the details to find out how much life insurance you need. We’ll break down a few questions that you should be asking yourself when you are thinking about your life insurance situation.
Do I need life insurance? Most likely, you need some sort of life insurance. If you’re not married and don’t have kids, a simple term policy to cover any debt and burial costs might be enough. Often your group term policy at your employer might be enough to cover you. It’s usually pretty cheap as well, so it’s a good place to start.
If you have a family, your needs might be a little more complex. Your life insurance requirement really depends on what kind of lifestyle you want to provide to the people you leave behind. Here are a few questions we like to ask when talking about life insurance:
Does your spouse work? If your spouse works, it’s important to talk about if they will go back to work should something happen to you. The important part is you want to make sure they have the time to reassess that question after there is a loss. A spouse can feel differently when emotion is factored into the decision on when (and if) to return to work.
How long do you expect to take off from their career if something happens to you? If your spouse works, they might decide they would like to take an extended period of time away from their job to make sure their family is taken care of before they return to work. In some cases the spouse might decide not to return to work at all.
What are your monthly expenses? You definitely want to make sure the monthly bills (food, utilities, transportation, etc.) are taken care of. It’s also a good idea to make sure you have an emergency fund in place to help take care of a few months of expenses.
How much do you have saved? You can use your emergency fund to fill in for any of those early expenses that might hit the family after a death (travel, funeral expenses, etc.). Life insurance funds can take days or weeks to be accessible, and you definitely want a little cash to take care of the near term expenses like funerals, burial, etc. You can always replenish your savings when life insurance proceeds are paid out.
How much debt to you owe? If something happens to you, your debts (house, credit cards, loans, etc.) will fall on your estate. The mortgage is probably one of the most important items we suggest having enough life insurance to cover. You don’t want your family to worry about how they are going to keep a roof over their heads while they are dealing with a very emotional loss.
Do you have kids? If you have kids, you definitely want to continue providing for them. If they are in school activities or sports, it’s a good idea to try to keep their lives as normal as possible. So make sure you have enough to cover their activities while they are still at home. It’s also important to consider after school care if needed – sometimes the parent that passes away is the main caretaker. So if the surviving spouse will need help shuffling kids to and from school and/or activities, there might be some expense there.
Do you want to provide for their secondary education? Some parents want to cover the full cost college if something were to happen to them. If that’s the case for you, it’s important to use an online calculator or talk to a financial advisor about how much you will need to put away today (should something happen to you tomorrow) to cover your kids’ future college expenses.
Other life insurance topics to consider
Is there a point when I might not need life insurance? There might be a point in life in which your assets you accumulated might cover most of the expenses that your family might need should something happen to you. You might have your house paid off and a considerable amount in your company 401k. If that’s the case, the cost of life insurance (which generally gets more expensive as you get older) might not be worth the benefit.
If my spouse doesn’t have an income – do I need life insurance on their lives too? We also talk to a lot of single-income households who think they don’t need life insurance on the stay-at-home spouse’s life. The income-earning spouse will need to return to work at some point, and if there are kids involved, someone will need to be paid to be with them during the summer and to run them back and forth to soccer practice.
Regardless of your situation, it’s important to know if you have enough life insurance. When in doubt, it’s a good idea to think you probably need more than you have right now and need more than you think you do.
A professional financial advisor or financial planner is the best source for analyzing your needs, but a calculator like this one might be a good place to start http://www.lifehappens.org/insurance-overview/life-insurance/calculate-your-needs/ If you’d like help with figuring out if you have enough life insurance, drop us a comment below or email us at brian.ruff@lpl.com