Most parents who are raising children, are at least somewhat financially responsible. They generally have day jobs where they work hard, pay their bills, provide shelter and food for their family and if there is any money left over, they may save a little bit for retirement. What I have found though, is that most are not adequately informed about the importance of life insurance.
If you have enough savings that your family could live without your salary for an extended period of time, you need not read further. For the rest of us, life insurance is not a luxury or a gift, it should be a priority just as important as buying groceries or paying your electric bill. The reason why is if something were to happen to any member of a household who earns income, there would not be a way to pay these bills.
How Much Coverage Do I Need?To figure out how much life insurance you need, a little legwork may be required. You need to calculate your total annual household expenses. Once you have that number down (we will use $50,000 for illustration purposes), you then need to estimate your final expenses. You must calculate funeral expenses, paying off your mortgage and any other debts, etc.. Although this sounds dreary, it is important.
Once you have these figures down, the formula to figure out how much life insurance you need is quite simple. You need $50,000 (your total annual household expenses), minus any other after-tax annual income from your household (a spouse’s paycheck), for 10 years. For example, lets say your spouse earns $30,000/year after taxes, you need $50,000-$30,000 =$20,000/yr x 10 years = $200,000. Now you just add on your death expenses ($230,000 for example). This brings your total life insurance number to $430,000.
Which Is the Best Type of Policy?There are many different policy types to choose from. Most of them have a built in savings vehicle. The cost associated with the savings portion of the plan is usually farely minimal. If you are reading this blog however, you can manage your savings on your own – you do not need a financial company to manage your investments and charge you a fee for doing so. To keep things simple, apply for a 30-year term life policy. This will allow you to pay just the premium for the life insurance policy with no built-ins or add-ons.
Life insurance is quite cheap these days with a $500,000 30 yr-term policy going for about $450/yr. for a 30 year-old male with good health. At this rate you should probably look to financially protect your family even further. If you can afford to do so, double the policy. The benefit of the extra cushion, should something happen, far outways the $450/yr in policy costs. Hopefully your family will never need to collect on a life insurance policy but, having one will help everyone sleep a little easier at night.
-PFG
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