Do I really Need Life Insurance?

by JamieList on January 28, 2010

Yes, you do.

As a parent, life insurance is a necessary part of planning, because it takes care of your family if something happens to you.  It is not an enjoyable topic, but it is something you should look into.  You will likely be surprised at how inexpensive a program can be.  The big questions is “how much should I get?”  That is different for everyone, but basically, there are three main reasons we buy life insurance:

  • To pay off debt (usually the mortgage and/or student loans)
  • To replace the lost income of the person who is gone
  • To pay for expenses what may arise when one or both parents are gone.

In the first example above, the amount is easy to understand.  If you have a mortgage of $200,000, you should have a corresponding amount of insurance to pay off the debt should something happen.

Replacing lost income is a bit more complicated.  What industry experts recommend is that you should have approximately 60-70% of your family’s annual income available should something happen to either spouse.  So, if both parents are earning $50,000, the family income is $100,000.  If something should happen to one of them, then there should be funds available to create an additional $10,000 to $20,000 per year, likely until the kids are finished at least high school.  If the children are young, this could mean that the surviving spouse needs this income for 15-20 years.  The insurance amount for this situation would be to create a benefit of $150,000 to $250,000 in the event that one of the two income earners is gone (this would be in addition to the insurance that is earmarked for debt repayment).  Here are two calculators to explore – Sun Life, LSM Insurance or there is a good one available at the Bearing Capital Partners website.

Finally, families should consider the added costs to the family if one of the parents is gone.  Will there be an increased need for daycare or housekeeping as the surviving spouse continues to work?  This could cost an additional $15,000 to $20,000 per year, depending on the number of children, etc.  For two children, a working single parent would need to have some kind of back-up, and we estimate that cost at an additional $15,000, until the kids are 16.  This would be funded in much the same way as the lost income, and would require approximately $100,000 to $200,000 (in our example) of insurance benefit.

Last, you might want to consider adding some small extras, such as an education fund and some final expenses, in order to deal with added burdens to the surviving spouse. The big question is “where do I get this stuff?”  There are two sources.  First, your company employee benefits plan likely has some kind of benefit, and there might be the opportunity to apply for more.  These company plans tend to be less expensive, but you run the risk of losing coverage if you leave your employer.

Your other option is to find a licensed insurance broker who can take you through the options.  Most young families should consider term insurance, which is an inexpensive method of providing a benefit.  There are other plans that have more permanent options, and that build up an investment value over time, but these can be looked at later, when you have some excess savings.  The important thing is to get some insurance in place and make sure that everyone is taken care of.

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