I just recently had a baby girl, my first child, and it has brought a lot of thoughts to the forefront that I otherwise never considered. I’ve been married for 5 years now, but have only had a beefed up insurance policy for the past couple years. I hate thinking about death and mortality, who doesn’t? But as my family grows and expands I’ve noticed that the thought of my death bothers me less and less. I really want to make sure they are protected. Knowing this is what will help me to sleep at night. I’m not going to get into the discussion on term versus whole life insurance, rather, I want to focus simply on the fact that you NEED A POLICY. Likewise, you need one that has ADEQUATE coverage. After that nothing else matters quite as much. Below I will go through some things to consider that will illustrate just how important having a policy is, even if you don’t think you need one right now, and how to take into account possible expenses in order to determine what a truly “adequate” amount means to you.
Let’s get the most morbid part out of the way first. Also, this is likely the first expense your family will face in the event of your demise. I had friends not long ago that had a parent pass away, and they were surprised as just how expensive a simply funeral can cost. Good thing they had funeral insurance in place already. Just a one day visitation with a low-cost casket ran them over $10,000! This isn’t something that is covered by your health insurance or homeowners policy. These are out-of-pocket costs that can put a serious strain on the average family budget if it isn’t properly planned for in advance. Consider the funeral costs, that of your final resting place, and the various other final expenses that go along with all of this. The last thing your family needs while grieving is to worry about the finances.
Loss of a Breadwinner
This should go without saying, but if you are the family breadwinner, then you need to consider a policy that covers the amount of your annual salary plus health and retirement benefits that will be lost. Consider your total compensation package, the number of years left that you planned on working, and then true that up by 1.25x just to make sure you adjust for annual inflation and other unforeseen expenses that inevitably arise. When you are tallying up those expenses make sure to account for the items you planned on helping out your children with. With the millenial generation we are seeing parents house and feed their adult children well into their 20’s now, much longer than what we have seen traditionally. Also, do you plan on paying for your children’s college education? You should find some financial calculators online that provide an estimate of the increasing cost of a 4-year education so you can factor in those expenses as well.
Who Will Care for Your Children?
A common misconception with life insurance is that only the breadwinners expenses need to be replaced. Unfortunately, this couldn’t be further from the truth. There are certain sacrifices that need to be made when you go from having two parents down to one. If one of the parents was a stay-at-home then you need to think whether that parent will need to go back to work and subsequently who will be there to care for the children. Will you need to factor in a nanny, housekeeper, or perhaps daycare? These are awfully expensive luxuries that might become a necessity in a single parent household.
Consider a Mortgage Payoff Policy
Do you still owe money on your primary residence? Most people think the only type of insurance they need in the even of a death is that of life and burial insurance, which couldn’t be further from the truth. Chances are, if you are like most of us, you still have plenty of years left on that mortgage. Often times policy holders will beef up their insurance to cover the cost of their remaining mortgage and tax payments. However, pricing out some alternative policies specifically designed to pay off your mortgage as a death benefit can often times be more financially advantageous. Either way, this is probably the single largest expense and piece of debt your family currently holds, and simply cannot be ignored.