Have You Thought About Life Insurance Lately?

Life insurance is one of those things that most of us do not enjoy thinking about.  The reason is obvious: it’s centered around our death or the death of someone else that is important to us.

Even so, it’s something that everybody needs to think about and plan for adequately.

The few with no needs

Some people don’t need life insurance.  If you have no dependents, no liabilities that will need to be paid off, and assets that could be used to settle your matters, you might be OK without a life insurance policy.

The rest of us

Most people don’t fall into that category.  Most of us, if we were to die, would leave behind those who would greatly benefit and likely depend on a life insurance settlement.

I’m 37 years old.  My wife is 30.  We have two children, aged 3 and 1.  She’s a stay at home mom, which there are considerations that should be taken into account.

If I were to die, all of our household income would go away, leaving her with nothing to provide for herself and our children.  If my wife were to die, our income would not be affected but costs would rise as my children would have to be cared for outside the home, with costs likely.

Therefore, we both have life insurance coverage.  Because of the reasons stated above, my coverage is higher than hers.

How much is enough?

Having the right amount of insurance is important.  Your goal should be to leave enough behind so that your loved ones could settle all of your financial matters, and have the money left to cover the change in income or expenses that would result from your death for an appropriate time.  That time depends on your situation and everybody’s is different.

My coverage is roughly ten times my annual income.  This seems like a lot, but if I were to pass, I would expect that my wife would pay off our home and fully fund the college plans for our children.  This would reduce the amount left by quite a bit, but would also reduce the monthly costs associated with those.  It would likely last her for a number of years, during which I would expect she would re-marry or devise a new life plan to continue forward.  In either case, it would be a bridge.

It’s important to have a good estimate of what you might need.  You may think there’s no such thing as getting too much coverage, but there is.  Getting a $10 million policy if your household income is $50,000 per year is likely very much overkill, and you’ll likely find that it will cramp your lifestyle while you’re alive.  A good life insurance policy should not do that.

You’ll want to perform regular review of your coverage.  Any time you have a life changing event (new baby, kid going to college, divorce, etc.) you should do a thorough review, and you should so periodic reviews along the way even if nothing changes.

Who knows what our final thought in this world will be?  We won’t know until we get there, but if you have a good life insurance policy, you’ll at least know that it won’t be wondering how your loved ones are going to make it.

9 thoughts on “Have You Thought About Life Insurance Lately?”

  1. I like how you started with your goal (pay off the house and fund kid’s college funds). It seems many people use a “rule of thumb” and forget how easy it is to do the math.

  2. I am lucky in the fact that my assets, along with my work provided life insurance, can pay off my debts. I don’t have any kids and my girlfriend has a decent job. While her standard of living may slightly decrease she could do fine without my income so I don’t have any life insurance other than through work.

  3. My wife and I have term policies to cover each other for loss of income. We virtually no liabilities, however loss of income would change my plans.

  4. Having a policy through your job poses an issue: if you get laid off or simply retire, you lose that coverage. IMHO a young family is better off if the wage earner(s) obtain insurance independent of the workplace.

    My ex- also carried enough insurance to pay off the mortgage. I still couldn’t have lived in that big house on what I could earn, but if the house was paid off, I could have sold it for enough to buy a nice patio home or townhouse and still had money to bank for our son’s education. Our problem, of course, is that he was so deep in debt — community debt, in our community property state — that what he would have left would have barely covered it. Best favor you can do for your spouse is to get your marital partnership out of debt and keep it out of debt…

    • Sound advice. I’ve looked into non-work coverage and it’s about 40% cheaper to stick with the work plans. I realize that if I ever left/lost my job, I’d have to make alternate arrangements.

  5. You mention a few very important considerations most people tend to forget. For one, you are factoring in your wife’s services. Many policyholders forget that even stay-at-home parents offer valuable services that you would have to pay for if tragedy strikes. Also, you discuss the proper amount of insurance. My research has led me to believe that 5-10x your annual salary, adjusted for assets, investments, loans, and liabilities, is a good amount. In the end, where you choose to land in that range is really up to your comfort zone.

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