How Much Life Insurance Do I Need?
Our two daughters, Elin (4.5 years old) and Audrey (6 months old), are growing up quickly. Audrey is learning to crawl. She is rolling onto her belly and then propping herself up on her hands and knees. She sways back and forth and scoots backwards if she pushes enough. While this seems exciting to us, she typically ends up frustrated and screaming as that is not the direction she intended to move. She also likes to babble “da-da-da-da” so that gives me a little confidence that I am the favorite parent.
Elin is learning her letters, sounds, writing, and sight words. She is very excited about reading. In addition to her reading, she has become more comfortable in the water. At her swim class, she earned the swimming badges for going underwater, kicking her legs, and paddling her arms. Each new experience and accomplishment make me feel proud as a Dad. I never thought I would burst into tears the first time my daughter came home from school excited to show me her writing and sound book.
As a parent and husband, I want to ensure that my family is protected. Naturally, one area that is top of mind for me is financial risk. This article will detail one of the foundational pieces of that protection by discussing life insurance.
Do I need life insurance?
Life insurance can serve many purposes within a financial plan but in most cases, this question can be answered by looking at two main areas:
Would your family struggle financially or have to change their lifestyle significantly if you died today?
Are there dependents or family members who will need ongoing financial support for the remainder of their life (a child with special needs, disabled spouse needing care, etc.)?
If the answer is “Yes” for either one of these questions, then life insurance is recommended.
What types of life insurance are available?
The two main types of life insurance are term and permanent.
Term Life Insurance
Term life insurance is a contract for a specified number of years. It typically offers a fixed premium payment during the term of the policy. The most common term lengths are 10, 15, 20 or 30 years. If the policy holder dies during the specified term, the insurance company will pay the death benefit to the beneficiaries. Term life insurance policies fit best when there is a need that will end at some specified time in the future.
Here are a few examples:
To cover debt payments such as a mortgage or student loans
To cover educational expenses until after the children graduate from college
To replace a parent’s income when the children are still minors
To replace a spouse’s income when the retirement plan is dependent on that spouse continuing to work until a certain age
Permanent Life Insurance
Permanent life insurance is a contract that continues until the death of the policy holder. Permanent life insurance policies fit best when there is a need for permanent insurance coverage. This most often occurs when an individual has family members that will need financial protection for their lifetime (i.e. a child with special needs or disabled spouse needing care). Permanent insurance is also helpful in cases where families have significant wealth and estate taxes will be due. There are many different types of permanent life insurance policies including whole life, universal life, and variable life.
How much life insurance do I need?
The amount of life insurance an individual needs is dependent on the future expenses they want to cover. Here are items to consider when calculating the required death benefit:
Current debt balances
Amount of annual income and total number of years that income will need to be replaced
Amount needed for educational funding
Lump sums needed such as funeral expenses, financial gifting for children or grandchildren etc.
Example:
Financial Information
Jim and Martha are married, 35 years old, and have two young children
Jim makes $120,000 per year
Martha is not currently working
They have a $300,000 mortgage
They have $20,000 in student loans
They have a desire to fully fund their children’s education if either parent were to die
Death Benefit Calculation
To meet their insurance needs:
Jim will select a 20-year term policy with a death benefit of 1.75 million ($320,000 for debt payoff, $250,000 for college education, 10 years of income replacement).
Martha will select a 20-year term policy with a death benefit of $750,000 ($320,000 for debt payoff, $250,000 for college education, $180,000 for childcare costs and for Jim’s potential lost income in the first 6 to 12 months following Martha’s death)
Where do I start?
It is important that you work with a knowledgeable independent insurance broker or financial planner. At The Dala Group, managing risk is a key part of the wealth management process. Please call the office or schedule an appointment through the website if you have questions about your life insurance policy or would like to discuss options available to you.
